Making the decision to buy your first home is both exciting and intimidating. Gone are the days of landlord-maintained assets, static fees, and readily accessible exit signs. This is the real deal. With one Google search, you’ll find that purchasing a home is much more than locating the perfect space for the perfect price. To provide some concision at a time when you probably have twenty tabs open and novels worth of information looming overhead, here are 3 basic steps to buying your first home:
Step One: Determine how much house you can afford.
There are a few things to consider in the early stages of your house-hunting. Debt-to-income ratio is a good place to start. An easy first question to answer: what is your annual income? Harrine Freeman, financial expert and owner of H.E. Freeman Enterprises, suggests that you purchase a home that costs two or three times your annual salary. But, as you know, ‘purchasing a home’ is just the tip of the iceberg.
Queuing up at the starting line means taking a look at how you can wisely distribute that annual income. Realtor.com proposes the 28/36 rule-of-thumb. For this rule, 28 percent of your annual salary (at most) should be allocated to the potential house’s mortgage, insurance, and taxes. The 36 percent refers to the percentage of annual income reserved to maintain debt-to-income ratio: the loans you have accumulated over the years, credit card bills, etc.
When it comes to your annual salary, you can afford to spend 64% (divided by twelve months, of course) on a house per month. If you were to add this number to the down payment, you have a pretty solid number for which to search the market for.
Unfortunately, approaching a down payment is the most daunting part of buying a home. Typically 20 percent of the home’s selling price, this can make first-time home buyers shy away from the entire process. Try not to worry; in addition to countless down payment assistance programs, which provide money to help you buy a home and even help to lessen the down payment percentage, there are numerous minor lifestyle changes you can make to help save.
Ditching cable for Netflix, packing lunches, and turning down the thermostat just 3 degrees can save you up to $500 a month. Put these savings in a dedicated account to earn interest as you save, and you’re on your way!
Throughout this process, be conscious of the ever-looming closing costs that accompany the finalization of your home. On average, these account for 2-7 percent of the home purchase price. Yet another hoop to jump through after you’ve closed on your home! The good news is that most of these prices are negotiable. Your knowledge on the matter is a definite advantage.
Apart from the appraisal fee, which is mostly non-negotiable since the lender selects the appraiser, home inspection fees, lender fees, and title insurance are entirely flexible; you may have the freedom to shop around for the prices and services that best fit your budget. And if you’re lucky (or persuasive), your seller might even cover the cost of title insurance since it is a commonly required, one-time expense to protect your ownership.
Make sure, however, to ensure that the loan estimate that you received from the lender at the beginning of the process matches the closing disclosure statement, and that no unexpected charges make an appearance on your bill. Pesky fees such as credit check, processing, application, and the annoying “miscellaneous charges” might add up.
Of course, home insurance is a must as most lenders require it to proceed with a loan. This will be a large expense, but just like many other closing costs, you have the option of shopping around. Most experts recommend closing on a house at the end of the month because the closing costs include any interest that accumulates before the end of the current month. But, before you sign the dotted line, do a final walkthrough of the house to ensure there are no structural or irreparable aesthetic damages.
Don’t let this take the fun out of house hunting. A quick chat with your real estate agent about your priorities, location preferences, and style choices will help narrow down the market with your best interests in mind.
Step Two: Check your finances.
Your credit score is probably the most important thing to check before shopping around or applying for loans. Some aforementioned down payment programs (The FHA, for example, which can reduce your down payment to 3.5%) require a credit score of 580 in addition to income and occupation requirements to be applicable.
Luckily, finding out whether you seem like a good investment can be determined with a simple inquisition of a lender. Find one you trust and could see yourself forming a relationship with to help you discover, develop, and better your credit score.
Your score is the first indication of any negative reports that might prevent you from inquiring about a home, so be sure to check before falling in love with a new space.
Step Three: Get Pre-Approved for a Mortgage
An easy way to prove your financial competence to a seller is to approach a lender and apply for pre-approval. Together, you will look at your financial past and present circumstances to determine how much money you’ll be loaned for the home. With financial backing on your home offer, good credit, and a basic understanding of the payments and fees required to purchase a home, you should feel confident enough to order the moving truck!
The best part of buying for the first time is that you’ll only have to do it once. And once you’ve bought a house, its much easier to buy another.
Happy house hunting!