A home is likely the biggest purchase you’ll make in your life. Whether you’re going it solo (well done you!) or planning on bringing a family to your new space, there are eight essential questions you should answer as you navigate the first-time home buying process.
1. How Much Can You Afford to Buy?
If you’re looking to buy a new home, you probably have some sense of the financials, but it’s important to think through all aspects of financing. Generally, you want to spend no more than a third of your gross monthly income on housing — but definitions vary on what’s included here. Think of housing as all aspects of your home expenses. For metro areas, this can even include things like parking and Home Owner’s Association (HOA) fees, which really add up and can take budget away from your primary house payment components.
First, you’ll want to think about what down payment you can afford. At a minimum, you’ll likely need around 3.5 percent of the purchase price to qualify for FHA financing programs, though many of these also require excellent credit and other qualifications. More traditionally, you’re looking at needing to put down 15-20 percent of the purchase price. A stronger (read: bigger) down payment not only can help get you a better interest rate on your loan, but also getting to that 20 percent down payment is critical as it helps you avoid Private Mortgage Insurance (PMI). PMI is required by your lender if you put down less than 20 percent as a way to help protect them against default.
In addition to your down payment, regular monthly payments and other expenses like home owners’ fees or maintenance fees, be sure you have a sense of what your property taxes will look like. This will really vary by location, so ensure you’ve chatted with an accountant and your friends in the area to understand how that can impact monthly expenses.
2. How Good is Your Financial Picture?
Bottom line: your credit will determine how expensive your mortgage is and whether or not you can access the best possible loan structure for your purchase. If you’re ready to start thinking about buying a home, you’ve probably started saving for these expenses, and alongside that, it’s helpful to start thinking about improving your overall credit profile.
Are your bills all caught up and credit cards in order? You’ll want to demonstrate a strong track record of payment history to be a compelling credit risk for a mortgage. Do you have other savings set aside in addition to your down payment fund? You don’t want to be completely wiped out of emergency savings and other short-term savings needs after a home purchase, so your holistic financial picture is important to consider.
While you’re in housekeeping mode here, get your financial documents in order. That means having good documentation of your income and knowing how to get access to employment verifications and other financial records. You’ll need them for your loan officer here shortly!
Source: Scribners Lodge
3. Who Can Help You With a Loan?
Oftentimes, a realtor recommendation from a friend or colleague can come with a loan officer recommendation too. As a good first step, you can also check with your own primary financial institution and see what their mortgage loan offerings are. It’s also worth checking out some of the new platforms like Lending Tree, Quicken Loans, and Rocket Mortgage to be able to compare rates and see what different options for mortgage structuring might fit your finances.
Above all, be sure that you are asking a lot of questions throughout the process and getting information cross checked by colleagues, friends, and family who may have gone through similar loan experiences. The application process can sometimes be overwhelming, and even the best-intentioned loan officers can put documents in front of you with fees you don’t understand, requests for signatures, or other documentation that can be confusing. Don’t feel pressure to rush through the process — you’ll have this mortgage for years and it is a huge commitment and expense. You deserve to feel completely comfortable about this financial commitment!
4. How Will You Source a Broker?
Depending on your city and financial situation, you might decide to either get pre-approved before you start house hunting, or you might start with sourcing a broker to hunt down your dream place. Again, referrals and online reviews can be super helpful in finding someone you connect with. Getting the right broker is another really important part of your house hunt, so take the time to find someone you click with and that you think understands what you are looking for.
Sometimes more importantly, they’ll have a good understanding (in partnership with your loan officer!) about the closing costs you’re likely to encounter. While in almost all instances the seller pays the broker’s fees, you’ll still likely be on the hook for a handful of closing costs that will vary based on your location. These can include taxes, title insurance, and other bank fees and can be upwards of 5 percent of your total home cost, so be sure to factor that in as you consider your initial expenses.
Source: Eye Swoon
5. Where Will You Look for a Home?
Location, location, location. We know this is the mantra for home hunts, but it totally deserves to be repeated here. Finding the right neighborhood for long-term you (and maybe your partner or family!) is a very different proposition than hunting down an apartment to rent for a while. As you start your house hunt, it’s worth being open to possibilities that you may not have considered as a renter.
Ideally, your home will be an important asset to you and part of how you grow your personal wealth. That means you might decide that there could be great upside and appreciation in picking a home in a neighborhood that’s still developing as opposed to something more established. Could you deal with a fixer upper to get your more ideal space?
You’ll also likely want to consider all the standard house hunting basics — schools districts, commute times, and neighborhood amenities. Again, give yourself permission to take some time here. While your home buying strategy might including a near-term resale, it’s more likely that you want to stick around in this home for a while to make the purchase cost worthwhile.
6. What Will the Timeline of My Purchase Look Like?
Timelines on the home buying front, and even more on the home building front can be unpredictable at best. It’s important to communicate early and often with both your broker and loan officer about what your expectations are, as well as that of the seller or builder. Have a good understanding of what each of these people can actually control in the process.
For example, you might have told your loan officer that you really need to be moved into your new place by the 15th of the next month. The loan officer can totally work toward getting your credit in place, but when you can actually march in the door of your new home isn’t entirely in her hands.
You might even have other wild cards to consider, based on where you’re buying. In New York, I contend with co-op boards, which require an extensive application process and your first born, (kidding, almost) that is largely out of your hands. You can absolutely have all your ducks in a row, but all of these moving parts will impact your move-in date. Be sure you right-size these timing elements against any leases and your current living situation, with a few contingency plans in place!
Source: Melissa Gayle Photo
7. What Funds Will I Need After I Buy a Home?
Wait — I still need more money? Um, yes a little. And not even so much more money, but the kind of money that still keeps the lights on and gives you the lifestyle you’re used to. House poor is a real thing, and while it’s totally common to have to adjust some aspects of your finances to adapt, be sure that you’ll be comfortably able to meet all your financial needs — still saving for retirement, emergencies, and other necessities. Even though it’s a somewhat stressful process, you want a new home purchase to be a joyful experience!
It’s easy to let the front-end of home buying be your complete focus, especially when it takes so much more nowadays to save to the level it takes to get a downpayment and other expenses in order. But it’s really worth thinking about what you want your financial situation to look like on day one in your new home. You’ll undoubtedly need a bit of a cushion for your new place for furniture, storage, and maybe even some unexpected repairs or additions. Allocating a bit of your home savings to “day one” helps mitigate these unpredictable financial add-ons.
8. How Should My Finances Change After I Move In?
A home is a big money move — congratulations, lady! You’ve put a lot into getting to the point where you can afford a home, and this major of a purchase really does change the landscape of your personal financial picture. If you aren’t already, now is a great time to consider engaging a financial planner, or tinkering around with a roboadvisor to understand how your new net worth looks and how your investment profile has changed.
A home purchase may also entitle you to some tax advantages, so consider meeting with your accountant to understand how your taxes and withholdings could change. Lastly, since this is one of the major life purchases most people save for, it’s worth thinking about what your next savings horizon might be. Should you be bumping up your retirement savings now? Or do you need start thinking about funding your children’s education? Getting back in the game with a focused savings goal is a great next action item to tackle… from the comfort of your gorgeous new living room!