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Buying your first home is as tricky as having your first kid.
You have no idea what to expect and can only hope you have what it takes! The only thing you can do is try to prepare yourself to have the smoothest delivery buying experience as possible.
Here you’ll get the low-down on what you should know before buying your first home. If you check off all these boxes then your first home purchase will go easy breezy!
You don’t just get approved based on income
Before you even begin thinking of purchasing a home you need to 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, we didn’t realize the approval process was more than just what we wanted to spend!
There are multiple different factors that go into a pre-approval process. The main ones are:
- income
- job length
- debt-to-income ratio
- credit score
- % down
Your Income:
Income is pretty basic. You know how much you make (hopefully).
Based on your income, they’ll figure out how much you can afford. The higher the income can mean the higher the loan.
That doesn’t mean that if you have a low income you won’t get approved for a loan.
Because so much depends on your income (okay, literally everything does) I’m always trying to find more ways to increase it. These are some of my favorite ways to increase my income every month (without doing a lot of work.)
Job Length:
Most banks require you to be at the same job for 2 years or more.
This isn’t the time to be switching jobs or trying to figure out your career path.
They want to see consistency. If you’ve been job hopping recently you’ll have to jump through a lot more hoops.
Myth: If I’m a freelancer/ independent contractor I won’t ever be approved. Truth: As long as you have 2 years or more of tax statements with fairly consistent income then it won’t be a problem.
Debt to Income Ratio:
I’ve always agreed that the less debt the better. That could’t be more true when it comes to getting approved for a housing loan.
Even if you think you can handle that mortgage payment, the bank doesn’t care. They don’t know you personally and aren’t going to take your word that you can afford all those payments you have.
All they see is how much of a liability you’ll be to them. Even though banks entice you to get in credit card debt, they aren’t going to trust you when you have it.
Credit Score:
Using your credit score they can figure out how “loan-worthy” you are.
Just make your payments, people.
If you don’t make your payments they’re not going to loan you the money.
Or, they may give you the loan at higher interest. Making your payment go up even more
Percent you put Down:
So here’s the thing. There’s some things in life that you just need to save money for.
I remember when I was in high school getting ready to buy my first car. I saw a commercial for a new car and the payments were $200 a month. And I thought to myself, “How stupid, why doesn’t everyone have a new car? These payments are so cheap!”
I was really the dumb one.
That’s because I used to look at things by PAYMENTS instead of by the FULL AMOUNT.
Most people don’t pay attention to the full amount when purchasing a home. It’s usually all about the payments.
You know how I mentioned the banks don’t know you personally? Because of that, they don’t really trust you.
Like, at all.
So to save their butts they’ve got to “insure” your loan. This is called PMI Insurance.
PMI Insurance is their way of putting added security on the loan.
If you put LESS THAN 20% down on a house, PMI insurance will automatically be applied.
You’re looking at an added $200+ onto the payment every month just to cover that PMI cost!!
So, that means that putting a high percentage of cash down (AT LEAST 20% or more) can give you major brownie points here. The higher the better.
Now, this PMI Insurance is completely avoidable and completely up to you. F
or me, if it means busting my butt for the next couple years and saving up so I don’t have to give more money to the bank.
– You probably didn’t realize all that goes into a pre-approval process, did you? Don’t worry, there’s a lot of people who have no idea!
You may be thinking that there’s a few things you could work on before you step into that bank. Or, you might think that you’re doing better than you thought and are eager to continue with the process.
Just seeing what goes into a pre-approval process 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.)
You thought that was it, didn’t you? Once you get an approval it’s all sunshine and daisies.
If you’re ready to see what comes after getting approved, read on.
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.
This is where home buyers make the SINGLE biggest mistake. Purchasing a house at the max they were approved for.
Here’s where you’re different from those people who forclose on their house.
You now know that you shouldn’t purchase a home for the max amount you are approved for.
There’s a reason that it’s your max amount.
The reason you don’t want to purchase at your max amount is because you always have to prepare for the unexpected.
If you’re barely making ends meet just making your mortgage payment, what happens when some unexpected expense comes up such as a job loss or medical bills (and yes sadly, it CAN happen to you).
There’s always something that comes up and you definitely don’t want to be scrambling to pay your mortgage.
Let’s talk about the other expenses that you need to consider.
Let’s pretend that you’ve been approved for $200,000. We’ll also assume that you 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
Utilities: $200
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 for 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.”
Trust me, all those things you think will never happen to you, WILL happen to you.
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.
Extra Costs
Remember that PMI insurance we talked about above? Yeah, totally unnecessary and avoidable. If you don’t have anything at all saved, chances are you’re not ready.
Not only do you have to consider PMI, but closing costs.
On average, you’re going to spend anywhere from 2%-5% of the home price on closing costs.
Having an Emergency Fund will Make or Break you
An emergency fund is like your floatie so you don’t drown in the ocean.
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).
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, 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 may not be worth it if you’re there for less than 5 years
It’s been proven that you need to be in a home for 5 years or more to start breaking even.
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 or to get any money back, try to sell for higher.
Doesn’t that sound like such a hassle?!
Sometimes a home purchase isn’t a long term thing, and that’s okay! In this case, renting may be a better option.
Yes, there is such a thing as a sellers and buyers market
In my post 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 meant going up as much as $60,000 above the asking price.
The market you’re in can extremely 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). You also 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 feel ready to purchase your first home? Is it something that is truly in your families best interest or do you just want a home because everyone else is doing it.
You may never feel totally 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 and an even better long-term investment.
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.
If you’d like to see how much a home would cost you check out this free mortgage calculator to run your own numbers.
You can never be too prepared.
So, I researched a couple of the best books on home buying that you can find below. The first is How to get Approved for the Best Mortgage, which is a comprehensive guide for first time home buyers; and the second is Home Buying Kit for Dummies.
Buying your first home can be easy if you’re prepared. Just by knowing what you’re getting in to, you’re one step closer!
Do you feel like you’re ready to buy a home?
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