So you’re gearing up to buy your first home and you’ve read our introductory article to prepare yourself for the biggest purchase of your life. Now it’s time to get down to the nitty-gritty, the dollars and cents.
How do you figure out your budget? What costs can you expect to pay?
In this installment, we’ll break down some of the answers to these questions and provide some tips for gathering the money you need to find the right home for you.
First-Time Home Buyer’s Guide: Understanding the Financials
1. Whip your Credit Score into Shape
The difference between a bad credit score and a great one can save you and your family thousands of dollars over the life of your mortgage loan.
Families with a poor credit history should not despair. If your credit is really bad, there are services offered that can help you spiff up your score. But if your credit is just okay and you want to take it to the next level, sign up on sites like Mint.com or Nerdwallet.com for budgeting help, tips on how you can improve your score, and monthly reports on any changes in your credit.
Your top priority should be to pay off credit card debt if you have any. If you don’t have much debt to begin with, improving your score can be as simple as expanding a line of credit.
Start by seeing where you stand and get your score, but keep in mind that the one you see is not necessarily what your mortgage broker will; scores differ depending on where they’re pulled from.
2. Determine your Budget
You can use an online mortgage calculator like those on Mortgage Calculator, Zillow.com or even through your local bank or credit union, to find a relative price range for your budget. But it’s best to go straight to the source – a mortgage lender.
A mortgage broker can use your credit score to tell you exactly what kind of payments you can anticipate on different kinds of mortgages.
3. Take a Lesson from the Housing Crisis
When looking for a new home, emotions run high, and the professional real-estate agents, who’s commissions are dependent on the purchase price of your home, have plenty of incentives to keep you at the top of your budget.
But you want to be strict about what you’re willing to spend, in case your mortgage rates ever rise. Once you have your range, don’t waver from it, no matter how charming the house or your broker might be.
4. What is Your Down Payment?
The down payment is the largest expense buyers face when saving up for their first home. It is the amount of money you “put down” as a deposit to purchase a home, as a percentage of the a total purchase price of a home.
These can range anywhere from 0-30% of the purchase price. While 20% is typically standard, it’s possible to get a home with 0% down with a VA loan (for veterans) or a 3% down payment with a FHA loan. Keep in mind that these routes come at a price – not only will your insurance rates be higher, but you’ll also be paying the cost of private home insurance.
The larger a down payment you can save for, the lower your monthly payments and overall costs will be.
And your down payment amount, credit history, credit score, total debt and annual income will influence how much of a loan you can qualify for. And what your interest rate will be.
Gathering funds for your down payment can seem incredibly daunting, especially if you’re still wrapping your head around paying off your credit card debt. But don’t panic! Here are a few tips on gathering the funds for your down payment:
- Automate your savings. Just like employees who have money taken out of their check for retirement, you want to automate your savings as much as possible. Talk to your bank about putting your down payment savings into autopilot.
- Tap into your retirement account. You can take a no-fee withdrawal from your IRA or Roth IRA of up to 10K, or a loan from your 401K for much more. Keep in mind that if you choose to do the latter, you need to pay the money back within a certain time frame, with interest.
- Start a side hustle and channel unexpected cash flow into your down payment fund. Can you drive for Uber? Sell your belongings on craigslist? Save your tax refund? Freelancing on the side or hanging on to that unexpected bonus can seem like a drop in the bucket, but the money can really add up! Start small and watch your savings grow.
- Do your research! There are grants and resources available to you at the state level, so start your home search by doing your research!
- Get some help. Do you have a family member that’s willing to help you make your dream home a reality? Tax law permits that you can be gifted up to $12,000 of tax-free money from a relative or friend. But a mortgage lender will want to have this transaction documented and know that it didn’t just come from another loan, so do your research before accepting any gifts.
5. Think About Closing Costs
There’s a lot more to buying your home than the price tag in the brokerage window. Conservative estimates states you can expect to pay around 3% of the cost of the home in closing fees and expenses.
Below is a list of just some of the additional expenses you should prepare yourself for.
- Home Inspection – Usually ranges from $300-500.
- Survey Costs and Appraisal – Usually a few hundred dollars, dependent on the services chosen and the size of the property.
- Taxes and Insurance – Mortgage lenders often want to see that you have at least several months of property and insurance costs saved before you’re granted your mortgage.
- Loan Origination Fee – This is the cost the bank will charge to have your loan application processed and depends on the size of your loan.
So, now that you have a rough understanding of the costs you can expect when purchasing your home. Stay tuned for the next installment and we’ll walk you through the mortgage approval process!
In this First Time Home Buyer’s Guide series, we will dig deeper into each of these sections and give you the lowdown on what to expect and do each step of the way.
- Section One: Overview
- Section Two: The Financials
- Section Three: What Do You Need/Want in A Home
- Section Four: The Mortgage Approval Process
- Section Five: Starting Your Search & Selecting an Agent
- Section Six: Making an Offer (Tuesday, 10/24)
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