Buying a home will likely be the biggest purchase you make in your life! That is.. until you buy your second, more expensive home. Here are a few things you need to keep in mind when buying your first home.
Knowing How Much House You Can Afford
Being able to afford a home is exciting, but before you run off and find your dream home, you should put some time into determining what you can really afford.
Make sure you do a credit score check before you get too far into the homebuying process. A low credit score means you will likely have to pay a higher interest rate on your mortgage. This can dramatically change the total cost to purchase a home!
Assuming your credit is in good shape, ideally higher than 720, and extra credit for those above 760, you should begin talking with one of our lenders. You can have a preliminary conversation about a mortgage and get what is called “pre-qualified.” This is an educated guess of what type of mortgage you may be able to qualify for based on your income, debt, and assets.
Knowing What You Qualify for versus What You Want to Afford
“How much can we qualify to borrow?” is one of the top questions we get! You can likely qualify for as much as 43% debt to income; which means the total of all your debt payments, plus the mortgage, can be up to 43% of your gross income. This will vary from borrower to borrower, and your loan officer will make sure to cover all of that with you!
The general rule of thumb is to try and keep your total housing cost below 30% of your gross income. The lower the better. Of course, the more debt you have (car payments, student loans, credit cards) the more pressure your budget will feel with a mortgage this high.
For those with larger savings, but lower-income, you may feel more comfortable with a slightly higher debt-to-income ratio.
Knowing How Much of a Down Payment Should You Make
Typically, the standard down payment was 20 percent or more. However, first-time homebuyers can often purchase a home with little or no down payment. You can make an educated decision with your loan officer on how much to put down. Keep in mind that if you make a down payment of less than 20 percent, you will likely end up paying private mortgage insurance (PMI).
Knowing How to Save for a Down Payment
If you have some idea of what a home that fits your needs may cost, it’s time to get serious about saving for a down payment! Of course, the more expensive the home is, the more down payment you will need.
If you are stretching, you may need to come up with an even bigger down payment to qualify for a mortgage and be able to buy the home. Additionally, your loan officer may ask that you pay off, or reduce other debts. Basically, we are saying don’t go buy a new car or make any major purchases on a credit card if you are house shopping. You’d likely be devastated if you missed out on your dream home because of credit card charges!
If you are lucky enough to have family members who are going to pitch in for the down payment, in most cases, you will need to make sure that the money has been in your bank account long enough to show up on two bank statements.
Knowing if You Should Consider a 30-year Mortgage?
Most first-time homebuyers will want to go with a 30-year mortgage. Shorter mortgage terms are typically cost-prohibitive. However, a shorter mortgage term could potentially help you save on interest and pay off your mortgage faster.
Unless you are saving enough for other financial goals, you shouldn’t look at a shorter mortgage term. This will likely mean you'll pay more interest to fully pay off your home mortgage.
Having options and flexibility is also important. If you are dead set on paying off your mortgage in 15 years (or less) consider getting a 30-year mortgage, but paying like it was a 15-year mortgage. This will allow you to weather any financial storms that could come into your life.
Knowing if a Bigger Payment Will Fit in Your Budget
If you are considering buying a home, we recommend trying to save the difference between your rent and estimated mortgage payment. That’s in addition to taxes and insurance. Ideally, you would do this for six-to-twelve months to make sure you don’t miss any unexpected expenses or emergencies! Another benefit is this money will help with the down payment and give you some extra money to move or help to furnish the new place.
A home is a major purchase. Our team will be here to help make sure you can buy a house that you can afford without sacrificing your financial future. Our preferred real estate agents will also help you find the right house in your budget.
If you are ready to get started. You can start your mortgage application by reaching out to one of our experienced loan officers near you!