Before clicking through pages of online listings or falling in love with your dream home, it's important for you to perform an audit of your finances. First, review your savings. Don't even consider buying a home before you have an emergency savings account with three to six months of living expenses. Calculate how much is remaining in your savings and investment accounts that could go toward a down payment.
Next, review exactly how much you’re spending every month–and where it’s going. This process will tell you how much you can allocate to a mortgage payment.
CHECK PROGRAMS FOR FIRST-TIME HOME BUYERS
Before you start meeting with lenders, it's good to know what constitutes a good deal. And that includes looking into special programs that might make it easier for you to find a property you can afford. There are various credits and incentives for first-time homebuyers, including being able to use a portion of an IRA without penalty for the down payment.
For example, the Federal Housing Administration (FHA) offers insurance for mortgage loans to low-to-moderate-income borrowers. FHA loans don't require you to have a perfect credit history and also offer lower minimum down payments as compared to conventional mortgages. However, there are various requirements that borrowers need to meet before qualifying for an FHA loan.
Although an FHA loan allows you to put down a smaller down payment, please remember that it'll cause your monthly loan payment to be higher–all else being equal. In other words, the downpayment doesn't just help the bank; it helps you lower your monthly loan payment since you've paid down some of the money owed. It's important to run the numbers for various scenarios with different down payment amounts to see how they impact your monthly mortgage payments. From there, you can determine the combination of down payment and monthly loan payment that you can afford.
MEET WITH A LENDER OR BROKER
A lender or broker will assess your credit score and the amount you can qualify for the loan. The discussion will include your assets–such as savings and 401(k)–as well as debt and any local programs that might be available for down payment assistance. Your research of first-time homebuyer programs can help facilitate a detailed discussion with a lender to better understand what programs are the best fit for you. Once you know the programs that you might qualify for, look for a lender that handles that particular program.
Although you can do some of the research online, work with a lender in-person who can review your situation, answer your questions, and suggest how you can improve your credit–if needed.
Remember, online calculators do not always include insurance and taxes or PMI [private mortgage insurance required if the down payment is less than 20%] and do not always provide an accurate picture of the payment or fees [involved].
SHOP AROUND FOR A MORTGAGE
Don’t be bound by loyalty when seeking a pre-approval or searching for a mortgage. Fees can be surprisingly varied. For example, an FHA loan may have different fees depending on if the loan is through a local bank, credit union, mortgage banker, large bank, or mortgage broker.
When you've found the best deal and program for you, it's time to get a mortgage pre-approval so you know how much house you can buy. Please note it's important that you get pre-approved, and not just pre-qualified. A pre-qualification is merely an estimate of how much you can borrow based on the financial information that you provided to a lender. The pre-qualification amount is not an agreement to lend you that amount of money. The pre-approval process is much more involved since the lender will ask you for copies of financial documents and check your credit score.
CALL INTEGRITY REALTY
Once you know how much you can afford and the loan amount you qualify for, it’s time to find a real estate agent. Look for one who works with a team of people who can offer suggestions for home inspectors, insurance agents, and other experts that might be needed for the property.
DECIDE ON A NEIGHBOR-HOOD
You'll probably have an ideal location, but keep an open mind as you see how much house you can buy in different areas. Homes and land are less expensive farther away from the city. On the other hand, it's important to consider the cost of a longer commute as well as the drain on your mental health.
CRUNCH YOUR NUMBERS AGAIN
If you're thinking about making an offer on a home, take another look at your budget. Make sure you have factored in closing costs, moving expenses, and any immediate repairs and appliances you may need before you can move into the home. Don’t overlook hidden costs such as the home inspection, home insurance, property taxes, and homeowners association fees
LOOK OVER UTILITY BILLS
First-time homebuyers are often moving from rentals that use less water and less energy, such as gas, oil, electric, or propane, versus the new, larger home. It's easy to get ambushed by soaring rates when your new house has ceilings higher than your rental unit–or older windows that are not energy efficient.
DON'T FORGET A HOME INSPECTION
After your offer has been accepted, splurge for a home inspection. Spending even $500 can educate you about the house and help you decide if you really want to pay for necessary repairs. You can also leverage your offer depending on the results of the inspection report and make the seller financially responsible for all or some of the repairs.
THE BOTTOM LINE
Purchasing your first home is perhaps the biggest financial decision you’ll ever make. Don't take on more of a financial obligation than you can handle.