Owning a home is the fulfillment of the American Dream. If you are planning to buy your first home, there’s lots to think about.
Consider your income. How much house can you afford? Buying a house is much easier if you have set financial boundaries prior to falling in love with something that is out of your price range.
Many banks require that your mortgage, insurance, and taxes be less than 28% of your income. If you earn $50,000 per year, your total monthly cost for mortgage, insurance, and taxes should not exceed $1166 (28% of your monthly income).
The bank also evaluates debts, like car payments, student loans, and credit card debt. Most mortgage lenders will limit the total monthly payments on existing debt plus your mortgage to about 40%.
If you are reaching the 40% debt threshold, you may want to rethink tackling a mortgage with all your other financial obligations, because the cost of owning a house is a lot more than just the mortgage payment.
The down payment on a home can be a big chunk of change. Most lenders prefer a down payment of 20% to qualify for a conventional loan, but you can put down less. A down payment of less than 20% means you must have private mortgage insurance, which is 1% of your original loan value. If your mortgage is $150,000, the cost of PMI and the subsequent increase in your mortgage payment is $125/month.
Take time to shop around for a mortgage. You’re going to have your mortgage for the next 15-30 years, so it’s worth digging into which mortgage lender offers you the best deal.
Adjustable rate mortgages have a low-interest rate to start which are adjusted over a defined time period based on the index tied to your rate. Payments can go up or down. Fixed rate mortgages have an interest rate that stays the same for the life of the loan. We recommend a fixed rate mortgage to eliminate unpleasant financial surprises.
Before you start home shopping, get prequalified for a mortgage. Based on the cost of the house, the prequalification and your down payment, you can calculate the price of the houses you should consider.
Make a list of the features you NEED vs WANT in a home, considering the number of bedrooms and bathrooms, kitchen style, a fenced yard, granite countertops, open concept, a garage, etc., and then rank them in terms of priorities. Decide whether the house or the neighborhood matters more to you, or whether you’re willing to make a longer commute in order to own a home with a larger lot. Make these kinds of decisions before you begin the search for your new home to limit the confusion that comes with too many choices.
In a perfect world, you’d find the ideal home, the perfect style, size, price, and location. But we don’t live in a perfect world, so realistically, you will probably have to compromise.
We’ve mentioned the down payment and mortgage, and there are lots of other costs associated with buying a house that first-time buyers often forget.
Most mortgage companies will require a home inspection, even on a new house. Inspections will reveal any hidden issues that may affect the purchase price or livability of the home. As the buyer, you are responsible for hiring and paying a qualified home inspector. Be cautious about using an inspector recommended to you by your realtor as they may have a vested interest in making sure the sale goes through. The average national cost for a home inspection is between $300 – $500.
An appraisal is also required to calculate the true value of the home, so the lender is assured the home is worth the money they are lending to you. The appraisal fee will depend on the size and complexity of the property, the average price is between $200 – $600.
An escrow account is generally required with low down payments or specialty loans like an FHA loan, so the lender has a guarantee that the mandatory costs, such as taxes and insurance will be paid. You can expect to put a large amount of money into an escrow upon closing to cover the costs for the year. After closing, the escrow account is funded each time you make a mortgage payment.
Your closing costs include the initial funding of an escrow account. The amount of money depends on the cost of property taxes and insurance premiums in your area. Those costs will vary even further depending on the county you reside in and your property’s specific attributes. For example, if you live in a designated flood zone, you’d be required to carry flood insurance, which increases the amount needed in escrow.
Closing costs average 3-5% of the purchase price. These costs could include loan origination fees; attorney fees; cost to record necessary documents in your county; cost for your lender to run your credit report, title insurance, etc.
In 2010, reforms were instituted to require lenders to provide you with a good faith estimate of the total closing costs. The final closing costs are not allowed to exceed 10% of the original estimate, so you can use the estimate to reliably budget for your closing costs.
If you buy a house for $150,000 and plan to make a 20% down payment and have 4% in closing costs, you’ll need to have about $36,000 in hand when you close on the property.
Once you’re handed the keys and all the paperwork is signed, prepare for even more expenses. Unless you own a truck, and all of your friends and family are willing to help, you will have to pay to rent a moving vehicle or hire professional movers to help you transport all of your belongings to your new home. Costs vary widely depending on the distance you’re moving, the number of belongings you own, and the extent of the assistance you receive.
If your home isn’t move-in ready, what projects do you still have to accomplish? Whether it’s as simple as painting, or a more involved renovation project, prepare for those expenses before closing on a home.
If your home is part of a homeowner’s association, make sure you know what the fees are, when they are due and what they cover.
When you own your home, you’re responsible for all utilities. If you are moving into a new area and don’t have a history with the various utility companies, you will probably have to put down a deposit in order to get service. Types of utility bills include electricity; water; sewer; gas and trash.
Last, but not least, you have to budget for the continued upkeep and maintenance on your home. A good yearly average is $1/square foot or 1% of the purchase price. This will vary based on the condition of the home, and the age of mechanical systems, roof, and appliances.
While the costs associated with buying and owning a home can seem overwhelming, as long as you budget appropriately, home ownership will be manageable and enjoyable.
The fact that you’re researching and educating yourself about home buying is a great first step to becoming a homeowner.