After getting your first job and you start to settle into a career at some point you’ll start thinking more long-term. Instead of shelling out X number of dollars per month in rent, your money could be put towards something more long-term. Have you ever thought of owning a home instead? Historically a home’s value increases over time, meaning it can serve as an investment. Pay for a $150,000 in a nice neighborhood, make some improvements/additions, and watch its value double over the next 20 years. Of course this is not always the case, but with the interest rate still low (4.2%) a house is not the worst purchase a person can make. Here is what a first-time homebuyer should know before signing off on the mortgage.
Evaluate your current financial situation
Are you in position to pay for the costs associated with a home? Think about your current job; is it stable? Can your income support the principal and interest, personal mortgage insurance (PMI), taxes, and other housing-related costs such as maintenance, gas and water, etc.? Your housing-associated costs should be somewhere between 25-33% of your monthly income. If you have to pay more than 33% of your monthly income to all housing-related costs, you should rethink buying or house or at least that particular house. It helps to have two or three people paying this down, so if you’ve got a couple good friends (or spouse) the monthly payment will be much more manageable. Take these guidelines as green lights to buy a house:
– Buying a home interests you
– You plan to live in this location for the next 5-7 years
– Your job is stable
– You have good credit (700+) correlating to affordable interest rate
– You have a few thousand dollars in the bank for a down payment
– You’re responsible and understand your personal finances
After finding out how much you can afford, go to the bank to get prequalified. They’ll tell you how much you can afford and this will determine if they’ll give you a loan for that amount or not. Keep in mind that this is the maximum amount that you could receive a loan for. This doesn’t mean you have to find a house for X amount of dollars. For example if you are approved for a $200,000 house, it may be more beneficial to shoot for the $170,000-$180,000 range if possible.
Know your state’s assistance programs
Many states offer some type of first-time homebuyer program. In Idaho for example, first-time home buyers mark on their tax sheets that they are indeed first-time homebuyers. They receive an $8,000 tax credit in return. If you’ve never done it before, buying a home can be a fairly daunting task. It’s the most expensive purchase many of us will make in our lifetimes. If you’re in your twenties you may still have student loans or credit card debt to pay off. Throwing a mortgage payment on top of that is an unsettling thought, and first time homebuyer programs are ways to help offset upfront costs.
Home repair and maintenance skills
One of the most overlooked aspects of buying a house is maintenance and repairs. No longer can you rely on the landlord to fix a leaky kitchen faucet or adjust the sprinkler system. Now that burden falls upon you. Repairs can stack up extremely quickly (especially for an older home), so the more applicable skills you have when it comes to home repairs, the more money you can save. YouTube is one of the best resources available, I can’t count the number of times I’ve had something that needs to be repaired and I find a tutorial on YouTube giving me a step-by-step guide to fixing the problem.
Threat of debt
In regards to the never-ending renting versus buying debate, you can do a quick search online and find opinions going either way. Some people love owning something themselves and feeling as if their money isn’t going straight into the pockets of a renter or rental company. On the other hand others don’t want the burden and responsibilities associated with owning a home. For those that do not want to own a home, taking on that much mortgage debt is one of the main reasons. It can be very easy to get duped by a bank telling you that you can afford a house that is 35-40% of your monthly income. The basis for the bank’s claim is that they assume the value of a home to continue increasing. That way, you can sell the house off in 5 years and not have to worry about remaining in the house for the entire loan term. Or so they say. The reality is this is one of the reasons people got into so much trouble when the real estate bubble exploded. Those same people have to deal with massive amounts of debt and will continue to do so for years to come.
Being a first-time homebuyer is exciting. It absolutely cannot be a quick, emotionally-driven purchase. You need to think long and hard about being a homebuyer. List out your budget and understand what you can afford, talk to the bank to get prequalified, and understand the pros and cons of being a homeowner. If you’ve done all this and are ready to make an offer on a house, you’re ready to buy your first home!
- License: Creative Commons image source
Frank McCourt graduated with a degree in economics. Since then, he has worked in a variety of financial settings. When not at work, you can find Frank watching too much B-rate sci-fi and talking too much about wine.