Do you really have enough money to buy your first home?
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Take a look at where you currently stack up against other financial goals
Before you start calculating how much you need for a down payment or shopping for mortgages, you need to make sure that you have some financial basics. Staying on top of the essentials can help you stay in control of your money and prepare you for long-term goals, like retire with enough money to keep you afloat during your golden years. And, these basics can help you maintain some financial security even if buying a home ends up being more expensive than you initially thought, or expensive things happen in the process.
“Start by asking yourself, do I have credit card debt? Said Pantalon. “If the answer is yes, then you are not ready to buy a house. Pay it off first. Then ask yourself if I have an emergency fund that can last for at least three months? The answer is no, you are not ready. Am I contributing to my retirement account at least up to the limit? If the answer is no, you are not ready. “
Know that the mortgage you qualify for is not always the one you can afford
When requesting a mortgage, an insurer will approve you for a loan amount that will be repaid in fixed monthly installments over a period of 15 or 30 years (with interest, of course). Lenders base this amount on your gross monthly income which is how much you earn each month before taxes, 401 (k) contributions, insurance premiums, etc.
“The bank may approve you for a larger loan than you can actually afford to take,” says Pant. “But what you qualify for and what you can afford are two different questions.”
Your situation may affect how much of a monthly payment you can actually afford. Take a married couple for example, says Pant. If the couple are planning to have a child and someone quits their job after buying a house, they will need to consider a house that they can maintain with just one person’s income.
These are some expenses that mortgage underwriters don’t consider when approving you for a loan, but they can affect how much you can comfortably afford to spend on housing each month. Another circumstance that can affect the amount of a mortgage you should consider is whether or not you are currently providing financial assistance to your family members.
“Maybe you have family overseas and send them remittances. It’s not the kind of thing an underwriter will be looking for, but it’s a responsibility that you have and that will strain your budget, ”Pant explained.
You can use a mortgage calculator to start getting a feel for how much mortgage you can afford, but don’t forget to take an honest look at your monthly expenses and other financial responsibilities you’re obligated to – a budgeting app like mint Where Personal capital can help you do that. This way, you can avoid feeling too tight between paying for a house, saving for retirement, and funding other necessary monthly expenses.
Know all the costs before starting the process
One of the most important (and well-known) aspects of buying a home is the the down payment, which is part of the price of the house that you will pay up front. The amount of down payment you ultimately pay can depend on the price of the house and the type of loan you take out. With an FHA loan, which you can qualify for if you are a first-time home buyer, your down payment can be as little as 3.5% of the home’s value. With a conventional loan, you can deposit as little as 3%, but conventional loans tend to have more stringent qualifying guidelines, like higher credit scores and a lower debt-to-income ratio. However, the average down payment in the United States is about 6% of the cost of a home.
There are also USDA loans, which are low interest rate loans that do not require a down payment. They are aimed at low-income people who do not qualify for traditional loans and who want to buy a home in rural or suburban areas.
Also keep in mind that if you put less than 20%, you will have to pay monthly private mortgage insurance (PMI for short for a classic loan) or a mortgage insurance premium (MIP for short for an FHA loan). You will pay the PMI or MIP until you have made enough monthly mortgage payments to have accumulated 20% of equity in the home.
And although home insurance is not required by law, some lenders may make it mandatory to take out a mortgage. So this may be another monthly cost that you need to consider when determining how much of a monthly payment you can afford.
Then, in order to officially call this place your home, you will need to pay the closing costs. Closing costs are a collection of smaller fees and costs associated with buying a home. They may include application fees, valuation fees, credit check fees, sales charges, title insurance and title research fees. These can all be around 2% to 5% of the loan amount, however, you may be able to negotiate to have the seller cover some or all of these costs.
So keep in mind that all of these costs can influence how much you’re willing to spend on your home each month, which in turn can affect how much you save for your down payment.
Don’t forget to account for all the “little” costs of homeownership.
There are also upfront costs of setting up in your new home that can affect how much you decide to save when buying a property.
“There are very variable costs that take up a larger chunk of your budget than you might think,” Pant explained. “You have moving expenses like buying a truck, hiring movers, and buying boxes and tape to move your things. And there are plenty of little things you’ll want around the house almost immediately like curtain rods, a shoe rack, a bath mat and more. These costs add up quickly. “
Pant says ignoring these costs is actually a huge mistake many first-time homebuyers make. So you can also consider saving separately for these expenses.
At the end of the line
Buying your first home can seem daunting. But before you get started, the first thing to do is analyze your financial situation to determine if buying a home is a good idea for you right now. If you have credit card debt you haven’t done enough contributions to a retirement account and don’t have emergency funds, you should pause the idea of buying a home until you take care of those obligations. FYI, you may be able to pay off your credit card debt a bit faster with a balance transfer card that won’t charge you interest during an introductory period, like the American bank Visa® Platinum card or the Citi® Double Cash Card.
Keep in mind all the costs of buying a home. How much you save for a home will depend on what type of loan is best for you and whether or not you want to take out monthly mortgage insurance. You’ll also want to be prepared to cover closing costs, moving costs, and new furniture for your home.
All things considered, if you think you can put a checkmark next to all of these costs, you might have enough cash to move forward with a home purchase. But even if you find that you don’t have enough to cover it all, it’s still okay to keep saving and not rush into a decision.
Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.