6 tips for buying your first home
Out of no where all of your friends are beginning to post “SOLD” signs all over social media. It seems like literally everyone you know is either getting married, buying a house, or having a baby. You have a serious case of FOMO.
But, there is no need! You can get into the game any time you are ready by purchasing your first home.
You may feel like you don’t know the first thing about buying a home and the whole process is straight up intimidating. Buying your first home should be an exciting accomplishment, not a hurdle you have to jump over in order to reach adulthood.
Once you decide that you are ready to buy your first home you should find yourself a reputable realtor and loan officer (who will assist you in the mortgage process). These people know all there is to know about home buying and financing. They can answer all your questions and should make the whole process easy to understand.
That being said, purchasing your first home isn’t completely worry free. You have a lot of responsibility to not only find your perfect first home, but make sure you can afford it.
I have purchased two homes in the past 5 and half years. By no means am I a house buying expert, but when I was just starting to think about purchasing my first home I didn’t even know where to start. I felt like the questions I would ask a realtor would be stupid. There were a lot of words and phrases casually dropped into conversation that I pretended to understand only to go home later and look them up so I could comprehend the things that were being said to me.
But, now that I have been through it a couple of times, I no longer find the process overwhelming. In fact, my husband and I are beginning to consider upgrading to a bigger house in the near future. The only thing I am nervous about now is finding that perfect home and being outbid (we live in an incredibly competitive real estate area)! Waiting to hear back about an offer you make on a home is like the highest stakes eBay auction you have ever been a part of. It’s that nervous energy that makes you wants to dance around with a huge grin on your face, while also simultaneously barfing your guts out. Super fun, right?
So I compiled the list of tips below for anyone just starting out on the home buying journey. I have come up with some crude numbers and examples just to keep the whole thing simple. Again, I am not a professional, so seek out your realtor or advisor for any personal advice. I hope that my tips below help you feel more like an “insider” during the home buying process instead of an awkward bystander not knowing when to jump in!
You can do this!
Purchasing first home tip #1 – Set your own budget
When you begin the pre-approval process for a mortgage the bank will conduct a debt-to-income ratio to determine how much you can borrow.
They look at your income (before any deductions like taxes and healthcare) and subtract any ongoing debt you have. For example, if you have student loans, credit card debt, or car payments those will all be included in your monthly debt. From there they use a set percentage (usually around 30%) to determine how much house you can afford on a monthly basis.
Of course, there are many other considerations, such as your down payment and interest rate, but for this example I am going to keep it super simple.
Example: Say your salary is $50,000 per year, and you have a monthly car payment of $150 and no other debt. That means that on a monthly basis your debt to income ratio is $150:$4166. With these numbers a bank may assume you can afford to pay around $1200 per month on a mortgage (I subtracted the debts from the income and multiplied that number by 30%).
“Okay”, you say “that’s not too bad, that leaves 70% of my paycheck to be used for other things”. Well, not exactly.
What the bank doesn’t take into consideration is, basically what it costs for you to just exist as a person.
For example, most people pay some sort of monthly premium for health, dental, and vision insurance. I’ll estimate that to be a reasonable $150. After deducting your insurance premium, as well as standard income taxes of 25% your $4,166 monthly salary quickly shrinks to a $3,012 paycheck. So let’s work with that number, the one you actually take home, instead.
A realistic (leaning more towards the conservative side) monthly budget may look something like this:
- Mortgage – $1,200 (what the bank said you could afford)
- Home insurance – $100
- Car payment – $150
- Groceries – $675
- Meals out – $200
- Car payment – $150
- Electric Bill – $75
- Water bill – $25
- Garbage – $20
- Cable T.V. – $40
- Internet – $40
- Cell Phone – $100
- Medication – $15
- Toiletries – $50
- Clothing and shoes – $150
- Gas for car – $225
- Other considerations – Daycare, personal/family loans, subscriptions services, vacations, entertainment, nights out, presents for others (it’s always someone’s birthday), landscaping services, ongoing repairs to car, etc.
Without deducting anything for the “other considerations” category above, you are spending right around $3,215. About $200 over what you take home from your paycheck.
So although the bank told you that you could afford $1,200, it doesn’t consider everything else you spend your money on.
I use this example not to lessen your excitement about becoming a home owner, but instead to educate you about the fact that banks aren’t looking at you on an individual basis. They simply plug in some numbers and calculate what they are comfortable lending you. It is up to you to truly decide how much you are comfortable spending on a monthly basis and setting a strict budget for that number.
When my husband and I purchased our first home (a modest condo) I told our mortgage advisor and real estate agent what I was comfortable spending. They both tried to convince me that we would afford more house. The advisor even said to me “why don’t you go and ask daddy for more money”. I wish I could have given her the middle finger and a slap across the face right then and there, but instead I stuck to the budget that I knew that I could afford (without “more money from daddy”). Needless to say, I won’t be working with those two people again.
Of course, it doesn’t hurt for your bank to pre-approve you for a higher number than you are comfortable with. If anything it makes you a stronger buyer because it shows that your financing should be quick and easy. Just don’t take the number they give you to be your budget. Figure out what makes sense for you and your lifestyle.
Only you know what you spend your hard earned money on.
Purchasing first home tip #2 – Understand your monthly payment
When calculating a mortgage there are numerous pieces. Often if you simply plug in numbers into an online generator it will spit out an example mortgage. This number may be misleading if it only includes principal and interest.
Principal is the sum of money that you borrowed and are slowly paying back over the course of your loan. Interest is the percentage you are paying to the bank to lend you that money.
Principal and interest are the two main components of a mortgage, but they certainly don’t make up the entirety of the your monthly payment.
A few other things to consider are:
- Home owner’s insurance – In order to secure a loan with a bank you will have to prove that you have purchased home owner’s insurance. This insurance protects your home from unexpected circumstance that would cause you to repair or replace your home. It’s price depends on the coverage levels and deductible you have selected. Usually banks have a minimum requirement for coverage that you will have to adhere to in order to secure a loan.
- Property taxes – Property taxes are taxes you pay to the government for owning your residence. The tax rates vary greatly, so it is best to do a quick search online for the rate in your area.
- Property taxes can either be included in your monthly payment to the bank, or you can handle them directly. If the bank handles the payment they will collect an estimated amount from you on a monthly basis and keep it in a reserve. They will make the tax payment on your behalf from that reserve when it is due.
- The amount owed for taxes can changed from year to year. So if the bank over collects they will send you a check for the difference.
- If you handle the payment directly, then you would be responsible for paying the tax when it is due as a large lump sum.
- Personally, I prefer the first route. Property taxes can be pretty hefty and I feel more comfortable budgeting a monthly amount for payment as opposed to making a large lump sum payment when due. Also, when you do get the bill in the mail it is a huge relief to know that you have essentially already made the payment.
- Private mortgage insurance – If you are looking to buy a house then you have likely determined what you can afford as a down payment. Ideally this amount is 20% or more of the purchase price of the home. However, if you are coming in with a down payment less than 20% you may be required to pay an additional fee to the bank.
- Every borrower is a liability to a bank. The extra private mortgage insurance that you would pay is a risk management strategy from the bank that will protect them if you default (can no longer pay) on your loan.
- This can be a substantial fee on top of your monthly mortgage payment.
- In a couple year’s time you may be able to refinance your house in order to remove the PMI. But until you do, you are stuck with it being an additional part of your mortgage.
Purchasing first home tip #3 – Budget for closing costs
Closing costs were the biggest surprise for me when we first bought our condo. I knew what our down payment would be, and the price we could afford, but I didn’t know that there was a whole other set of fees that we would be responsible for.
In short, closing costs are the fees that pay all the people (besides the real estate agents who make a commission from the sales price of the home) who worked to make the transaction from the previous owner to you possible.
There are tons of people behind the scenes doing paperwork, conducting audits, inspecting, authorizing things, etc. All of which costs money. Meaning that, unfortunately, there are fees involved.
Expect to spend between 2% and 5% of the cost of the home on closing fees. So for example, if you are buying a $250,000 home, set aside an additional $5,000 to $12,500 for closing costs.
If you are in a buyers market you may be able to negotiate closing costs with the seller as part of your offer.
Purchasing first home tip #4 – Check for other fees
If you aren’t quite ready for a single family home, then a condo our townhouse might be perfect for you. However, keep in mind that many of these styles of home also have a Home Owners Association (HOA) fee. An HOA may cover the cost for landscaping, water, garbage, or the maintenance of the building itself, so they charge a fee to cover these costs. Some units even charge multiple HOAs.
It is important to not only understand how much the monthly fee is, but also what is included in coverage. If the monthly fee covers things you may have already budgeted for (i.e. water, electricity, internet, or even insurance) then the fee may be manageable. However, if coverage is minimum, but costs hundreds of dollars you may want to reconsider that location.
Purchasing first home tip #5 – Think about the future
One thing that can have a great affect on the value of a home is the school system nearby. Even if you are single and feel very far away from the idea of children, keep the school district in mind.
Check the school ratings on any of the major real estate websites to see where you stand.
For resale value you are much better off purchasing a home in a better school district.
Of course, this also may mean that your purchase price is slightly higher as well. However, if you do end up staying in your “starter” home longer than expected you may be comforted by the fact that those children you thought you wouldn’t have are now in an awesome school system.
Purchasing first home tip #6 – Don’t buy anything, yet!
No, I don’t mean a house, I mean all the stuff you can’t wait to put into that house. Once you are in the escrow process (when your offer has been accepted, but the sale has not closed) of a house you may be eagerly mentally decorating each room and starting to buy furniture to fill the space. But, don’t!
The bank runs your credit multiple times throughout the process of purchasing a home. If you run out and spend thousands of dollars on new furniture it’s going to show up on your credit report and may affect your loan rate or purchase of the home.
So, look, but don’t buy just yet!
That also goes for other big purchases non-home related too. If you are on the market for a new car hold off until your house closes to make that purchase.
I hope these quick tips make you feel a little more comfortable throughout your first home buying experience.
I know it can be a little scary, but once you get started you will be surprised how quickly things start to come together.
Happy first home house hunting!XOXO, -M. Have a great day!