How do I get started?
So you are sick of throwing your money away on rent and are finally ready to buy a home! What do you need to do next?
The 1st most critical step is to figure out what you can afford. Our number 1 piece of advice for Buyers: find a mortgage lender that you like, and get approved for a loan. If you don't know what your loan amount could be, how do you know what kind of house, and what area of town, you can afford to buy? Before you even start to look at homes and get your hopes up, please take this important first step!
In a competitive Seller's market where inventory is low, and multiple offers for one property are common, we cannot stress enough the importance of getting prequalified for a loan. We will not be able to submit an offer for you without this letter from a lender. As well, you may find that you need to take some additional time to improve your credit, or put more savings aside, in order to begin your house-hunting in earnest.
As a rough guideline, how do you know what kind of mortgage payment payment you can afford to make? The Federal Housing Administration (FHA) generally uses a 43% debt-to-income ratio rule as a guideline for approving mortgages. This ratio determines the ability of the borrower to repay the mortgage. What this means is that all of your debt payments plus housing expenses -- mortgage, HOA dues, property taxes, insurance, etc -- shouldn't total more than 43% of your monthly gross income.
For example, let's say that your monthly gross income is $5,000. Multiplied by 0.43, this equals $2,150. You should not spend more than $2,150 on debt payments (including housing). If you have monthly minimum credit card payments of $200, a car loan for $300, and student loans for $100, this is an additional $600 that gets applied towards that debt figure. So $2,150 MINUS $600... this means you can afford $1,550 for housing per month.
That being said, whether or not a lender will approve you for a mortgage for that amount will depend on many things: credit score/worthiness, monthly income, how much debt you have, how long you have been at your current job, what kind of assets you have, and other financial qualifiers.
Costs for first-time buyers
Besides coming up with the down payment and closing costs and prepaids, Buyers should keep in mind that there will be many more cash expenses in the first year of ownership as well as ongoing maintenance expenses. No one wants to buy a big gorgeous house, then be unable to furnish or decorate it to their standards!
The biggest mistake new buyers can make is underestimating the costs of buying a house and maintaining it over time. Many experts agree that homeowners should have 1%-3% of their homes’ purchase price in savings for improvements and surprise expenses. It’s wise to have at least six mortgage payments in the bank after a closing. These estimates may not work for everyone, but if you are spending above your means on a new home, you may quickly find yourself in financial trouble.
The inspections that get done after putting a house under contract are important for the first-time buyer, as they list repairs that will be needed for the home. A buyer should put together a short-term and long-term plan based on the inspection(s) so they know how much money they will need in the months and years ahead.
Renters are accustomed to paying basic utilities. Homeowners, on the other hand, must also pay for water, sewer and trash collection—as well as property taxes, homeowner’s insurance, homeowner’s association dues, yard care, termite/pest treatment, and other expenses unique to your location.