How exciting! You’re about to go into so much debt that it could take you 30 years to get out of it – I’m just kidding (kind of). Buying your first home can be absolutely frightening and super exciting all at the same time. You never really feel like you’re ready to buy your first home – or you might not even know what the home buying process consists of.
Whatever the case, I’m here to give you the low-down on all you should know before buying your first home. If you check off all these boxes then your first home purchase will go easy breezy!
Getting approved is more than just your income
Before you even begin thinking of purchasing a home you should probably make sure you’re even approved. My husband and I “knew” the amount we wanted to spend on a house and what we could afford. But because of our situation (not working for longer than 2 years) we weren’t even approved to close to what we wanted to buy a house for.
There are multiple different factors that go into a pre-approval process. You have:
& I’m sure a whole bunch of other things that they don’t want to tell us!
Typically they want you to have a stable job for 2 years or more. Based on your income, they’ll figure out how much you can afford.
Myth: If I’m a freelancer/ independent contractor I won’t be approved. Truth: As long as you have 2 years or more of tax statements and have had stable income then it won’t be a problem.
After figuring out how much you can afford based on your income, they’ll examine the dreaded d-e-b-t that you have. The less the better (obviously.) If you have more debt than they think you can handle, chances are you’ll be approved for a lot less.
Using your credit score they can figure out how “loan-worthy” you are. If you don’t make your payments there’s no way they’re going to want to loan you the money.
Putting a high percentage of cash down (AT LEAST 20% or more) can give you major brownie points here. The higher the better. If you don’t have the required (yes, it’s required) 20% down then they’ll be forced to add on PMI insurance. This is a little added security for the bank so that they can get their moneys worth out of you. This could also cause your approval to fall lower since you’ll add on a possible 100+ bucks a month.
If you’re thinking in your head, “There’s no way I’m going to be pre-approved, I’m not going to even try!” I’m sorry that I scared you, but buck up and still try. All of those factors come in to play but some institutions are a little more lenient than others. Just seeing what your pre-approval options are will give you a better understanding on if you’re actually ready to buy your dream home. (Just kidding, you know you’ll want something new in like 5 years.)
There’s more expenses than just a mortgage payment
You’ve got your pre-approval back, and you’re pleasantly surprised that they approved you for more than you thought. Thinking how great this is, you and your spouse start to look for houses that are higher priced and closer to the max amount you were pre-approved for. WRONG. If you can take away anything from this post then I want it to be those – DO NOT purchase a home for the max amount you are approved for. There’s a reason that is your max amount. Because if your expenses are any higher than you won’t be able to afford it. And trust me, when purchasing a home your expenses will go higher than just a new mortgage payment. Buying at your max is how foreclosures, bankruptcy and forever living paycheck to paycheck can happen. Just don’t do it.
Okay, now that my rant is over let’s talk about the other expenses that you need to consider. For this step we’re going to do some fun number games – let’s pretend that you’ve been approved for $200,000. We’ll also pretend that you listened to me and saved up that 20% and put a $40,000 down payment and your loan is at 4% interest.
Your Monthly Payment: $764
Add Taxes: $100
Add Insurance: $85
Misc Repairs: $150
GRAND TOTAL: $1,299
That’s a lot more than the original $764! Now what happens if you don’t put down that full 20%? Say you only put $5,000 or even none at all (GASP!) You’re looking at an extra $150-$200 a month from PMI insurance.
You’re probably scratching your head at the miscellaneous repairs and thinking, “There’s nothing that will ever go wrong in my home. It’s like-new and won’t need a dime put in.” Wrong again. Trust me, all those things you think will never happen to you, WILL happen to you. Or, you’re just like me and spend the money on new decor. It’s a good thing my husband loves me so much …
Remember all those little costs that can add up when getting ready to purchase a new home. Most people don’t even think about it, and that’s how you end up living paycheck to paycheck. Now you understand why it’s super, super important to not purchase at your max approval price. Leave some room for extra expenses.
They add special insurance just for you
Remember that PMI insurance we talked about above? The added insurance that can cost up to an extra $200 a month just because you didn’t want to save up the money to put as a down payment? Yeah, totally unnecessary and avoidable. If you don’t have anything at all saved, you’re not ready. If you put down less than 20% on a house you can guarantee they’ll add it.
Not only do you have to consider PMI, but closing costs. You’re going to spend anywhere from 2%-5% of the home price on closing costs. If you feel completely comfortable and confident that you can pay for the closing costs and put a decent amount down (preferably 20%) then you’re pretty safe. No use paying more than you should just because you didn’t want to take the extra year or two to save.
Having an Emergency Fund will Make or Break you
We’ve already talked about this – I know you think that nothing is going to happen to you and life will always be fine and dandy. But I hate to tell you that you’re wrong. I just want you to be prepared and smart.
Typically, you need to save 1% of your home costs for ongoing maintenance every year.
If you bought your home for $200,000 that’s $2,000 a year (or, $166 a month). You NEED to have an emergency fund for your home. That $150 a month that I included in your payment above was being generous. Don’t wait for problems to happen and then scramble to find the money. Just be prepared to begin with, and you’ll be MUCH happier.
You also need to have a general emergency fund for other expenses besides a home. Like losing a job (stop rolling your eyes, yes it can happen to you.) Or, even having auto repairs which tend to come up super frequently.
The rule of thumb from Dave Ramsey is to have 3 to 6 months of your expenses saved up in your emergency fund. Again, that’s a lot of money so start with a smaller goal. Shoot for $5,000 and build your way up. That gives you enough leeway to not have to go into even more debt right after buying a brand new home.
It’s not even worth it if you’re there for less than 5 years
Are you going to be in your new home for more than 5 years or will you be relocating way before that?
You typically need to be in a home for 5 years to start breaking even on what you spent to begin with. That first 5 years is basically just paying the interest. At that time you haven’t even made a dent in your principal. You would now have to try to resell at the purchase price you bought for (you better hope the market is still the same as when you bought) or to get any money back, try to sell for higher. Doesn’t that sound like such a hassle?!
There’s so much upfront cost that it’s not even worth it if you’re not planning on sticking around for that long. In this case, renting may be a better option.
Yes, there is such a thing as a sellers and buyers market
Yes, you should definitely consider what type of market you’re in.
In a post I did about the benefits of renting I mentioned how my husband and I experienced an extreme sellers market. Living in Utah and having it be the fastest growing state (I know, surprised me too) means a major shortage of houses. House prices have increased as much as $100,000 and putting in an offer on a house means going as much as $60,000 above the asking price.
The market you’re in can definitely affect your buying power. In our case, builders can sell their homes ridiculously overpriced and have them snatched up in days. In a buyers market you have a lot more leeway. You have the deciding power of finding a home that you truly love (and not just picking one because you can’t find anything else) – and you have the opportunity to even come in UNDER asking price. If you know that you’re in a seller’s market and are afraid of paying way too much for a house, it doesn’t hurt to wait it out.
Your gut knows more than you do
Gut feelings go a long way. Your gut is a lot smarter than it takes credit for, and you should listen to it. Do you honestly feel ready to purchase a new home? Is it something that is truly in your families best interest or you just want a home because everyone else is doing it.
You may never feel completely confident about purchasing a home (and that’s completely normal) but just make sure you’re prepared. Buying your first home can really be a great experience – even though I may have made it sound a little scary.
Only you know your financial situation (and, of course, your lender) and can tell if you’re ready or not. Whatever you choose, I hope these tips helped you make a decision and be a little more informed about what actually goes into buying your first home.
Now tell me below, are you ready to take the plunge of buying your first home?
P.S. Know someone who’s thinking of purchasing their first home? They totally need to know what goes on, so be sure to share with friends and family below 🙂