When people picture the American dream, one of the things that always comes to mind is having the home with the white picket fence. Whatever your taste may be, home ownership is still very much part of the American dream. It is also probably the biggest financial decision you will make in your lifetime. Here are some tips for first time home buyers:
Some buyers may already be ready to purchase their dream home. For others, they may be ready for a “starter home” and then build their equity and wealth into the home of their dreams. How much of a mortgage payment you can truly afford will likely depend on your lifestyle as well as assets, income and debt.
Knowing your credit score is crucial. A low credit score means you will likely have to pay a higher interest rate on your mortgage. This can dramatically change the total cost to purchase a home.
Once you have a budget in mind and if you feel you are financially prepared, you should talk to a qualified lender. You can have a preliminary conversation about a mortgage and get what is called “pre-qualified.” This is an educated guess of what type of mortgage you may be able to qualify for based on your income, debt and assets. In the current market this is especially important since it will allow you to be more competitive when putting in an offer on a home.
The general rule of thumb is to try and keep your total housing cost below 30% of your gross income. That doesn’t take into account any other debt you may be carrying whether it be student loans, car payments, or credit card debt. While you may qualify for a more expensive home, you may want to consider purchasing a home with lower payments in order to not put unnecessary strain on your budget.
There are some exceptions to this rule. For example those who are self-employed may have more money than it appears they do on paper. Or if you have a large amount of savings that you can access in case of an emergency or pay off the mortgage early. Look at your individual financial situation and think over how much you can comfortably afford since you’re typically committing to a 30 year mortgage.
Historically, the standard down payment was 20 percent or more. However, first-time home buyers can often purchase a home with a down payment of little to nothing. Making a larger down payment may not always be a smart move. At the same time, if you can’t come up with a down payment at all you may not be ready for home ownership. Why? Because expenses like the mortgage, taxes and insurance are just the beginning. There will inevitably be maintenance and repair costs which could easily turn a home into a money pit.
Seeing if family can help with a down payment to meet that 20% threshold can also prevent you from having to pay for PMI (Private Mortgage Insurance) which basically insures your lender and is an additional expense to avoid if possible.
Most of this article has focused on the financial considerations to make before buying your first home, but that is just the beginning of the process. Be sure to find financial professionals, mortgage brokers, and real estate agents that you feel comfortable with who can help you navigate the waters.
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