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First Time Home Buyer
If you’re finally ready to make probably the biggest financial move of your adult life and buy a home, then CONGRATULATIONS!
This is one the most exciting (and scary) adventures of being an adult.
Start here to help you along the way and make sure your finances are in-line and where you need them to be. Start your journey with these seven important steps:
1. Evaluate your assets and liabilities (ie debt). Lenders typically look for a savings cushion big enough to cover a few months of mortgage payments, plus your down payment and closing costs. Lenders generally like to see a debt-to-income ratio of no more than 43 percent.
Lenders calculate this number by dividing your monthly debt payments (such as student loans, car loans, credit card payments etc.) by your gross monthly income.
Total monthly debt payments of $1,000 / Gross monthly income of $4,000 = 25% debt-to-income ratio.
2. Create an estimated budget. Add up your estimated monthly home expenses, including your mortgage payment (principal, interest, insurance, taxes and possible HOA fees), and ongoing home maintenance. Don’t forget the maintenance costs – you will have monthly/yearly expenses. For estimating home maintenance costs, many experts suggest budgeting 1 to 2 percent of your home’s value each year.
Ideally, your housing costs should account for no more than 28 to 30 percent of your gross monthly income.
In addition, there might be “start-up” costs to buying a home. Are you going to need a lawnmower to mow the lawn? Does your new home come with appliances included? Or do you need to purchase your own refrigerator and/or washer and dryer. These 3 appliances are typically not included and can be expensive to buy brand new, so make sure you have money set aside for “start-up” costs/purchases. And remember, things break, sometimes unexpectedly, so save accordingly.
3. Determine your down payment. Being able to put 20 percent down on a home is your best course. If you can’t afford 20 percent or more down, then you are probably buying “too big” of a house. A down payment is a major determining factor in how much home you can afford, the size of your monthly payment, and the types of financing options available to you. For instance, FHA loans may require as little as 3.5 percent down, while VA loans have no down payment requirement.
********* Very Important Note: If you put less than 20 percent down, you’ll have to pay mortgage insurance (PMI) every month until you have at least 20 percent equity in your home, but for FHA loans you will pay mortage insurance premiums (MIP) which are now harder to get rid of. If your FHA loan originated after June 2013 and your original LTV is 90% or less, you’ll pay MIP for 11 years. If your LTV (loan-to-value) is greater than 90%, you’ll pay MIP throughout the life of the loan. That’s 30 years of MIP.
Premiums can be 0.5 to 1 percent of your mortgage amount per year. This can calculate to THOUSANDS of extra dollars you have to pay each year. PMI and MIP only benefits the mortgage companies and banks. You are paying THEIR premiums on an insurance policy that protects only them if you default on the loan and end up in foreclosure.
Ideally, you should be only buying a home if you have at least 20 percent to put donw. Putting 20 percent down is going to save you the most money and get you better financing options.***********
4. Check your credit reports. Your credit report impacts your mortgage loan approval and the interest rates for which you qualify for (a low interest rate is going to save you money). Request free copies of your credit reports once every 12 months at AnnualCreditReport.com. Review and correct any errors before you apply for a mortgage loan.
5. Understand your financing options. Find a broker or lender and talking about your options. For instance, did you know that some loans require as little as a 3 percent down payment? You can also choose from different loan lengths (most common are 15-, 20-, 30- year options), and fixed or variable rate mortgages. For first-time home buyers, there can be special offers and incentives available as well. A good place to start is Lending Tree.
6. Organize mortgage application documents in advance. Gather up all the papers you’ll need to complete a mortgage application. You will need:
Social Security numbers and birth dates of all borrowers.
Current address or previous addresses if you have been living at your current address for less than 2 years.
24-month employment history including name, address and phone number of employers.
Copies of last 2 pay stubs.
Copies of W-2 forms for the last 2 years.
Bank statements for the most recent 2 months and quarterly investment statements.
Any other additional income you wish to include on your application to qualify for the loan (e.g., child support or alimony).
Homeowner’s insurance information declaration page or insurance agent’s contact information.
Landlord contact information (if you are currently renting) – include name, address, phone number.
Copies of last 2 years of federal tax returns.
7. Now you are ready to get pre-qualified.With your lender, get an idea of how much you may be able to borrow for a home purchase. Remember, though, that just because you can borrow it doesn’t necessarily mean you should. Remember to live within your means. Go back to your budget to determine how much you can realistically pay every month, and base your home price decisions on that figure.
That being said. Make sure you are buying a home for the right reasons. Make sure it make sense to you. It’s a big purchase. You don’t have to buy a home (ever) if you don’t want to or it doesn’t make financial sense to you. Over at Go Curry Cracker, him and his wife plan to never buy and will rent for life.
Don’t buy a home because you’ve been told that it is what you’re supposed to do as an adult.
Don’t buy a home because you are trying to “time” the market. Buy when it is the right time for you.
Don’t buy a home because you think it will be a good, short-term investment for the future. It’s not really a guaranteed good investment. It’s best to be in it for the long-haul, but even then there’s no garauntees.
Don’t buy a home because you might get married one day and have a family and you are dreaming of the picturesque ideal house for this hypothetical future.
Don’t buy a home because you’re trying to “keep up with the Joneses”. It will just hurt you finanically and make you fall further behind in the long run. Realistically, “The Joneses” are probably up to their eyeballs in debt anyway.
Buy a home because you are ready and it 100% makes financial sense for you.
Buy a home because it’s better for your budget than other housing options (i.e. renting). But, remember to compare the short and long term variables.
Buy a home because it’s what you want and you know you can handle all the challenges of homeownership.