Buying your first home can be scary and stressful. A home is a huge investment – both upfront and ongoing. Plus, there’s so much paperwork, companies, contractors, and things to remember that it can be overwhelming and have you worried about making a costly mistake. Here are some things to consider when buying your first home.
Who qualifies as a “First-Time Homebuyer”?
According to the U.S. Department of Housing and Urban Development, a first-time homebuyer is someone who matches any of the following:
- An individual who has had no ownership in a principal residence during the 3-year period ending on the date of purchase of the property. This includes a spouse (if either meets the above test, they are considered first-time homebuyers).
- A single parent who has only owned with a former spouse while married.
- An individual who is a displaced homemaker and has only owned with a spouse.
- An individual who has only owned a principal residence not permanently affixed to a permanent foundation in accordance with applicable regulations.
- An individual who has only owned a property that was not in compliance with state, local or model building codes and which cannot be brought into compliance for less than the cost of constructing a permanent structure.
These criteria are important to keep in mind if you’re trying to take advantage of any first-time homebuyer programs such as low- or zero-downpayment programs from the FHA (Federal Housing Administration).
Things to Consider When Buying Your First Home
Why do you want to buy a home?
Maybe you’ve been renting for a while and want to build your own equity instead of someone else’s. Maybe you like the idea of being independent and chasing the American Dream. Maybe you’re relocating for a new job, figure you’ll be there for at least a few years, and want to be able to make some money from selling your home before moving again. Or maybe you just saw the cutest home ever online and need to have it.
Whatever your reasons, consider both your short- and long-term goals. How does buying a home fit with those goals?
Are you financially ready to purchase and maintain home?
Take an honest look at your finances. Buying your first home, or any home, can take some serious cash upfront – even if you’re getting downpayment or closing cost assistance. Some other common upfront expenses can include inspection(s), appliance purchases, and moving costs. But buying a home also means being able to afford ongoing and unexpected expenses such as utilities and repairs.
Do you have money saved up? If you don’t have any savings, it’s going to be extremely difficult (if not impossible) to buy a home. On top of a downpayment and closing costs, you’ll also need to be able to afford to pay for inspection(s), moving costs, utility transfers, driver’s license and car registration updates….. You get it. And after all of that, you should still have enough money left over in your emergency fund.
If you need to take the next year (or more) to save up some money, make sure you’re saving it somewhere that your money can make its own money – the magic of compound interest! Consider using a high-yield savings account.
Where’s your money going every month? Take the time to review your current ongoing expenses and compare that to what you’re making on a monthly basis. This can give you a general idea of what you’ll be able to afford (or feel comfortable with) on a mortgage payment. It can also show you what expenses you may want to cut back or quit.
Our favorite free expense-tracking and budgeting tool is Mint. It even has an app so you can keep up with your budget on the go!
Most people buy a home by getting a loan/mortgage. In order to qualify for a loan, you’ll need good credit (generally a score of 640 and up), an established history of paying on time, and a low DTI (debt-to-income). Your DTI ratio is something that all lenders seriously consider when deciding on giving you a loan. The exact percentage may differ depending on the lender, but there are a couple of percentages to aim for:
- Front-end ratio (AKA your “housing ratio”): This is your housing payment. It shouldn’t be more than 30% of your income before taxes (gross income).
- Back-end Ratio: This shouldn’t be more than 38%. It includes your car loan, student loans, credit cards, and housing payments.
There are many free tools to check up on your credit score and credit report. Most common credit cards today allow you to check your score for free. Probably the most popular free credit checkup tool is Credit Karma. It can give you a good idea of what your Transunion and Equifax scores are and ways to improve them, but keep in mind lenders use different scoring methods so the score you see there may not be what they see. What’s most important to do with a tool like this is check your report for any derogatory remarks and incorrect information. If you see anything wrong on your report, it’s critical to get it fixed as soon as possible.
What are your wants vs. needs?
Consider what you absolutely need in a home first, then think about what you want. Needs can include how close it is to work, how many bedrooms/bathrooms, and even the type/features of the home required for the loan you’re getting. Do you need a single-family home, townhome, condo, or mobile/manufactured home?
Next, consider your wants. Do you want to take care of your lawn or would you rather hire someone else to do it? Would you like to live in a community with an HOA and rules about garbage cans, recreational/company vehicles, and paint colors, or would you rather be able to do what you like on your property? What’s your ideal home layout? Do you like a particular kitchen or bathroom layout?
Keep a list of these wants and needs and reference them frequently. Consider the importance of each and what you’d be willing to compromise on. (This list can also be extremely helpful for your REALTOR®!)
What can you qualify for?
Since you’re getting a mortgage, it’s important to know up front how much a lender is willing to lend you. You may think you can afford a $400,000 house, but a lender may take a look at your income, debt, employment history, and other factors and determine they’re only willing to lend you $300,000.
Getting preapproved will not only help you know what homes you can afford to look at, but it can also help put you in a better position to buy the home you want. Sellers, especially in more competitive market seasons, may not even look at an offer it doesn’t come with a buyer’s preapproval.
We recommend you get preapproved with our lender partner, Lisa Meyer.
What can you really afford?
After you learn what a lender is willing to lend you, you need to decide for yourself whether you’re comfortable both borrowing that much and with the monthly payment. Most lenders, including our lender partner, can give you an estimated monthly payment (including principal, interest, property taxes, insurance, and HOA fees if applicable) for the home you’re thinking of buying.
Take that estimated mortgage payment, add that and estimated utility/other home expenses to the ongoing expenses you calculated earlier, and subtract that from your monthly net income. Do you have any money left over to save, afford an unexpected expense, or spend on things like entertainment, clothing, and travel? If you answered “no” to any of those questions, you may want to consider reevaluating your price-point.
What’s out there and who can you trust to get you your first home?
Working with a REALTOR® you trust is critical to buying (and selling) a home. They’ll help you find homes that meet your wants, needs, and budget and negotiate the best offer for you. They can also protect and guide you through any problems that arise (there’s always something!). And the best part is that you don’t pay anything out-of-pocket to have an expert on your side!
We would love to be your REALTORS®. Our whole team is dedicated and ready to help you buy your first home. Whether you’re ready to buy now or need help developing a plan to buy down the road, we’re here to help!