Becoming a first-time home buyer is an exciting time in your life. A place to call your own that you can create a comfortable space to call home and build your future. If you’re dreaming of your first home, you’re probably also dreaming of the time your family will spend it, how you’ll decorate it, and all the memories you’ll make there. The thoughts can be intoxicating.
But before you actually purchase your first home and start making memories, it’s important to protect your financial future by taking a few necessary actions.
- Get yourself on solid financial ground
Owning a home is a lot more expensive than renting an apartment. In addition to your mortgage, you’ll need insurance, you’ll pay property taxes, and you’ll be met with unexpected expenses like repairs and renovations.
Don’t put yourself in a position of being house-poor where almost all of your extra income goes into your home. Before you start shopping, pay off your debt, build your credit score, and build an emergency fund. Reducing your debt and increasing your credit score will save you money in the long run by allowing you to qualify for a better mortgage at a lower interest rate. And having an emergency fund will help you get through some of those unexpected expenses. Or worse, an unexpected job loss and loss of income for a period of time.
Protect your future home and your finances by taking care of your debt and creating a rainy-day fund before you start house hunting.
- Figure out how much home you can really afford
In addition to your mortgage, HOA fees, taxes, and insurance, you’re also going to need money to live. You still need to buy food, pay utilities, and manage your other expenses. With all this in mind, your total home expense (including fees, taxes, and insurance) should be no more than 25% of your monthly income.
Take your monthly income and multiply it by .25 (25%) to get the maximum amount you can afford to spend on your home every month. You will then need to consider how much of a down payment you can afford to put down. In most cases, you’ll need at least 10%, but more is better. With a higher down payment, you’ll be able to afford more house and reduce your monthly mortgage payment.
- Create a down-payment savings account
In addition to paying off your debt and building an emergency fund, you should also be saving for your down payment. 20% is optimal and will keep you from having to pay for private mortgage insurance (PMI) that protects your mortgage company in case you default on your loan.
Some mortgages offer reduced down-payment options to first-time home buyers, but can end up costing you more in the long-run. Adjustable-rate mortgages bring you in at a low rate, but increase that rate over time, which in turn increases your monthly payment. An FHA loan will require a lower down payment, but you’ll need PMI for the life of your mortgage which results in thousands of dollars that doesn’t even go toward paying off your mortgage.
Building a substantial down payment fund is the best way to protect your finances in the long-run.
- Don’t forget closing costs
These fees are in addition to your down payment and mortgage payment and they’ll be due when you close on your new house. They include fees for:
- Home appraisal
- Home inspection
- Attorney fees
- Fees for running a credit report
- Homeowner’s insurance
These fees can average as much as 4% of your home purchase price. For a home of $200,000, that’s an additional $8,000 you’ll need. And yes, that’s in addition to your down payment!
- Get preapproved
Once you have enough saved, you’ve paid off your debt, and you’ve increased your credit score, it’s time to get pre-approved for your mortgage before you start shopping. Pre-approval will not only make the buying process go faster; it will help you to know exactly what price range you should be shopping in.
If you try to live a debt-free lifestyle that results in a lower credit score, you’ll need to find a lender who believes in debt-free homeownership to work with you.
- Work with a realtor
Finally, find a realtor to help you find the right home for you. Realtors know the various neighborhoods, school districts, and housing trends to be able to help you get into a home that you can build a solid future in. A realtor’s fees are paid by the seller, not the buyer, so take advantage of their services and experience to help you make the right move.
Being a first-time home buyer is exciting. Make sure the entire experience is a pleasant one by preparing yourself in advance for what’s to come.
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