Buying Your First Home: 3 Financial Steps

Buying Your First Home: 3 Financial Steps

Buying your first home can be quite exciting – and stressful. One of the biggest stressors is figuring out how to prepare financially for this big purchase. Here are the three steps you need to take so that you can find and close on the right home.

Step 1: Know How Much Home You Can Afford

Although many people buy homes for investment purposes, when buying your first home, you will want to be sure that you buy something that makes sense for you today – not for some time in the future. This means that you need to look at affordability.

What is affordable varies among homeowners, but there is a rule of thumb to consider. We suggest keeping your total house payment (this includes the mortgage, taxes, and insurance) to under 30% of your monthly gross income. If you spend much more, you may be able to afford the payments, but you will not be able to afford to do anything else. It is what some people call “house poor.”

Step 2: Prepare Your Finances

In order to buy your first home, you are going to need three things. Let’s look at what they are:

1. Good Credit – To know whether your credit is good enough to get a mortgage, you can check your credit report. If you need to improve your score, you can do so by paying down credit card balances, avoid taking out new credit cards, and paying all your payments on time. Remember, if you are buying a home with your spouse, their credit will also need to be in good shape.
2. Save Money for Expenses – The first thing you’ll need is money for a down payment. This can be as little as 3.5% for an FHA loan or as much as 20% for a conventional loan. (Some loan programs like the VA loan and USDA loan require no down payment.) You will also need money for closing, which can be as much as 5% of the cost of the home.
3. Have Verifiable Income – Finally, your lender will want to know that you are gainfully employed. To prove this, you will need to get your documentation in order. This includes things such as your W2s, bank statements, 1099s, and two years of tax returns.

Step 3: Find a Mortgage

Before you begin looking for a home, you should get a mortgage pre-approval. This is a document that lets you know how much money your lender is willing to provide to you when you are buying your first home. As you begin looking for mortgages, be sure to look at:

1. Mortgage types – There are fixed-rate mortgages with an interest rate that stays the same through the length of the loan, and there are adjustable rate mortgages (ARMs) that fluctuate depending on the current interest rates. Most people find that the fixed-rate mortgages are best, however, if you plan to keep a home for less than five years, an ARM could be a good decision. Make sure to look at a mortgage calculator to see what different terms mean for your monthly payment.
2. Fees – In addition to the interest rate, there are also other lender fees attached to mortgages. These include appraisal fees, credit checking fees, documentation fees, and points to reduce your interest rate.
3. Private mortgage insurance (PMI) – Many loans require that you take out PMI if you put down less than 20% on your home. This insurance will protect the bank in case you do not make your payments.

Be sure to shop around for the best mortgage for your situation. You can do this by going to different banks and seeing what they have to offer, or going to a broker that will shop the lenders for you.

If you have questions about your finances or would like a list of our preferred lenders, give us a call. We have helped hundreds of first time homebuyers get into their dream home, and we’d love to help you with buying your first home.