Before you make the commitment of buying a home, you should examine your reasons for doing so. Most people buy homes to live in, but others buy them to rent out. Some people buy houses because they plan to start a family. There are many great reasons to buy a home, but you should know why you’re taking such a major life step and feel certain of your convictions. Here are some other things you should know before buying your first house.
Know How Much You Can Afford
Determine how much you can afford based on your income, expenses, savings, debts, and assets. If you need help figuring out how big a monthly payment you can afford, speak with a financial advisor rather than your banker. Bankers have incentives to make larger loans, and the math they use to determine what you can afford can lead middle- and working-class families to believe they can afford more than they comfortably can.
Generally, you should spend no more than 30% of your gross monthly income on housing. You’ll need a down payment of anywhere from 5% to 20% of the purchase prices (though this can be as little as 3.5% for FHA financing). Online mortgage calculators can give you rough estimates of monthly payments based on mortgage size, interest rate, and term length.
There Will Be Hidden Costs
Your monthly payments will not only include loan costs, but also costs like property taxes and homeowner’s insurance. You may be required to buy private mortgage insurance depending on the size of your down payment. The home buying process also incurs many costs. Closing costs may be 2% to 3.5% of the home’s purchase price and covers things like attorney fees and title fees.
Next step: Sign up for Mint and start working on your financial goals like home ownership.
Know What Kinds of Loans You Qualify For
Your financial and credit history determine the type of home loan for which you qualify. Lenders examine pay stubs, tax returns, and credit scores when determining eligibility. You’ll qualify for better terms if you’ve been employed at the same job for several years, and lenders treat salaries differently from commissions and bonuses. The interest rate you qualify for depends on your credit score. You should obtain free copies of your credit reports and check them thoroughly for errors before applying for a mortgage. Once your lender has all the necessary information, you should receive a Good Faith Estimate spelling out the details of your loan so you know exactly what you’ll get once you sign the papers.
Consider Mobility
If your current career path or relationship could take you to another city, state, or country in the next five years, you should think extra carefully about the wisdom of purchasing a home. You could be stuck having to sell a house in a slow market, or you could end up turning down career opportunities because you feel anchored to the place where you purchased a home. Once you consider closing costs and the costs of selling again, you tend to come out better financially by renting if you think you might be moving within five years.
Choose Your Real Estate Agent Wisely
It’s important that you choose a real estate agent with whom you can communicate easily and who will work on your behalf once you find a house you want to buy. Learn about their commission structures and how familiar they are with the area in which you want to find a home. Ask questions like how long they’ve been in real estate, and try to get a feel for how easy they are to reach and talk to. You’ll be spending plenty of time with your real estate agent, so take the time to choose carefully.
Understanding Closing and What Happens Afterward
At closing, your realtor, lender, and an attorney will meet and tackle a big stack of paperwork. You’ll be walked through every page so that you understand what you’re signing. During closing you’ll go through all the paperwork until everything has been initialed and signed. When it’s over, you’re given your copies of the paperwork and the keys to your home. After that, you can enjoy the tax benefits and generally favorable investment characteristics of home ownership!
Budget tools like Mint can help you set financial goals like saving up a down payment and budget your money carefully so home ownership doesn’t overwhelm your budget. Mint has your back when you’re getting your finances on track for big purchases like your first home.
Next step: Sign up for Mint and start working on your financial goals like home ownership.