This is an exciting time! We're here to help you through the process.
The first step to buying a home is understanding what you can spend, both on a monthly mortgage payment and in up-front costs. Getting your mortgage pre-approval from a lender lets you know what you can afford and where to start setting your sights. A pre-approval does not guarantee you a loan, and buyers with good credit history may be pre-approved for a loan much larger than what you can actually afford.
So what good is the pre-approval? It gives you a starting point for narrowing down your search and lets real estate agents and sellers know that you are a serious buyer, which can give you an edge in competitive markets.
With that purchase price budget in mind, work backward to determine your down payment and monthly budget.
You may have heard that you need to put 20 percent down on a house to secure a mortgage. While this is an excellent motivator for savings, first-time buyers will be relieved to know that there are other options. Buyers can put down as little as 3 percent of the total purchase price—and certain buyers may qualify for a no-money-down loan through various government programs.
The downside of paying less up front is that you’ll pay more in the long run: The more you borrow, the more it will cost over time in interest. You’ll also need to pay private mortgage insurance, or PMI, until you’ve paid off 20 percent of the loan’s value. PMI protects the lender in the event of a foreclosure.
Most mortgages also require the buyer to pay closing costs, typically 2 to 5 percent of the total purchase price. This can double the out-of-pocket expenses—and it’s often a surprise to first-time buyers. There are ways to include the closing costs in your loan, however it often means a higher interest rate. You may be able to negotiate these costs with the seller through a lower purchase price or by splitting the closing costs.
You will also typically pay additional fees for the application, an appraisal, title transfers, and inspections, among other items. Get a loan estimate from your lender so you have a realistic picture of that final up-front number.
Once you understand your purchase price range, a mortgage calculator will give you an estimate of what to expect in monthly payments at varying down payment percentages and interest rates. Ask your lender for a rate estimate to make this as accurate as possible.
As for the budget, a good rule of thumb for monthly costs—which include not only your mortgage payment, but also insurance, property taxes, and any homeowner’s association fees—is no more than 25 to 30 percent of your monthly gross income. This ensures that you’re not getting yourself into more debt than you can handle.
With your finances settled, the fun part begins. Whether you’re looking for a starter house or your forever dream home, it’s important to consider location: the neighborhood, school district, ease of commute, and noise from traffic are all important factors when deciding where to start looking. Location is pretty much the only thing about a house that you can’t change after the fact.
Once you’ve narrowed down a search radius, build a realistic vision of what you need: number of bedrooms and bathrooms, a garage, outdoor living space, etc. If you regularly host guests, make sure you have adequate space to accommodate your frequent visitors. Do you work from home? A dedicated office space with a door is a must-have.
Try not to get too hung up on fixtures and finishes. Granite counters and hardwood floors are great amenities, but they’re also fairly easy upgrades to make later. Even larger remodel projects are doable for the right price. Be realistic about what you can spend on updates—both in time and money—and how much you’re willing to do.
Have a good understanding of your preferences, but also keep an open mind. Look at a variety of homes and price points in your budget to get a feel for the size of rooms, floor plans, and different ways to make use of space. It will help you feel more informed and sure of your final decision.
Buying your first house is a big responsibility and milestone, but it doesn’t need to be scary. Preparing yourself with financial knowledge, a solid budget, and a reasonable set of expectations will make the process smoother and give you confidence in finding the right home for you and your family. Find out more and learn about how The Money Store, MLD Mortgage can help you out.