With all of the crazy going on today, and everyone staying home more than ever due to continued lockdowns and restrictions, it is more important than ever to make sure you have a cozy space to call home. This is the reason I decided to share my savvy tips for purchasing a new home as my husband and I just did that… we bought a new home and it is the best thing to happen to us since well…..forever! Now let’s discuss the process and the many tools and tips I have learned along the way to help with the home purchasing process, including tools to make sure you can afford that new home of your dreams and so that you can know what to expect in terms of your monthly payment and how much ’home’ you can actually afford.
The one thing I for sure learned while looking to purchase our new home, is to not use those mortgage calculation tools that the realtor listings have on the various retail listing pages. These calculators do not take into account additional factors that may increase the mortgage payment amount. We actually had been looking at the real estate market for about a year and a half before getting a pre-approved loan and really getting serious about the home purchase process. We were unsure of the area we wanted to purchase into and we were unsure on how much we could afford, which is something that I think many are unsure of when jumping into the home buying process. When we originally started browsing and looking around at homes and the different price levels, we thought we could afford ‘more’ as the rate calculators they used on the site gave us that impression. We were very wrong though as those platforms are not taking into account the tax rates you will have to pay based on the area that you are looking to live in, as well as insurance fees, PMI and more. This is the reason I did my research to find the tools available online such as Monthly Mortgage Calculators and Advanced calculators that will help in factoring in all possible costs. These tools were crucial in helping my husband and I into making a more informed decision and it’s the reason I decided to create and share these savvy tips to help in the purchase of your first home.
1) Pay Off Your Debts & Build An Emergency Fund
My first tip is a tough one but super important as you want to get started on the right foot when buying a home. It is super important to get your debt paid down and to get an emergency fund started for you and your household. This is super important as owning a home is expensive, much more expensive than renting, even if the payment is less that your rent amount would be. This is because you are now the one responsible for upkeep, maintenance and home repairs. This can add up fast which is why having no debt or very little debt as well as 6 months worth of emergency expenses, is crucial to have in place when going to buy that new home. If anything is to go awry, you will be able to take care of it and then some.
2) Figure Out How Much House You Can Afford
Before you even start browsing around at the homes in your area, it is important to find out how much home you can actually afford. I promise…. you will want to do this as we learned the hard way and happened to fall in love with a house that we could not truly afford and we ended up a bit discouraged and on the sad side… so if I had done this beforehand I could have saved myself a lot of grief. As I noted above…. there are many factors that have to be added into that monthly amount including HOA fees, taxes, insurance, etc. and you want to make sure that you mortgage payment after all of this is factored in, is going to be no more than 25% of your monthly take-home pay. You can use a minimum income requirement calculation tool to help you here.
Before you even start browsing around at the homes in your area, it is important to find out how much home you can actually afford. I promise…. you will want to do this as we learned the hard way and happened to fall in love with a house that we could not truly afford and we ended up a bit discouraged and on the sad side… so if I had done this beforehand I could have saved myself a lot of grief. As I noted above…. there are many factors that have to be added into that monthly amount including HOA fees, taxes, insurance, etc. and you want to make sure that you mortgage payment after all of this is factored in, is going to be no more than 25% of your monthly take-home pay.
So keeping in mind that your mortgage payment should be no more than 25% of your monthly take-home pay… let’s say you bring home $6000 a month, simply multiply that by 25% to figure out your maximum monthly house payment. 25% of $6000 would be $1500. Now depending on how much you put down…. you can afford a more expensive home. Examples below……
*$180,000 home with a 10% down payment ($18,000)
*$200,000 home with a 20% down payment ($40,000)
Now the numbers above are a ballpark estimate for what someone who makes $6000 a month take-home pay can afford. Please keep in mind though that things like property taxes and homeowners insurance will affect that monthly mortgage payment amount so you will need to factor these in before deciding what your maximum home price budget will be. Since property tax rates and homeowner’s insurances vary, check with your real estate representative and insurance company to get an estimate. This will help you to calculate how much house you can truly afford and you can also use tools like this mortgage calculator, to help you to factor those numbers in and find that perfect number.
3) Save For Your Down Payment
Now that you know how much house you can truly afford…. it is time to save for that much needed down payment. You can save up 10%, 20% and even 30 or 40% to put down on the home you want to purchase. It is suggested to save 20% down as that way you will not have to pay for private mortgage insurance or PMI, which protects the mortgage company in the event you cannot make your payments and end up in foreclosure. The more you can put down is beneficial as it will only lower your payments as you will owe less on your loans overall.
Now if you are worried that you cannot get to that 20% down mark…. you can look into first-time homebuyers programs that offer single-digit down payments, but only do this if you have too as the loan will only cost you moire in the long run….the less that you put down on the home to start with. Some options for low-to-no down payment mortgage options are Adjustable-Rate Mortgages (ARMs), FHA Loans and VA Loans. These provide single digit down payment numbers and some no down payment at all…. but in the event the real estate marker shifts, you could easily end up upside down, owing more than the market value of your home.
For this reason… my husband and I did not go with a FHA loan but rather a 15 year, fixed-rate conventional mortgage with a 20% down payment. A 15 year, fixed rate mortgage gave us a higher mortgage payment but we will be paying off our mortgage in half of the time plus we have a lower interest rate which saves us thousands of dollars on interest. The best part is the fixed-rate conventional loan keeps our interest rate the same for the life of the loan, which protects us from the possibility of higher expenses due to rising interest rates. You can also look into the 30 year mortgage as it will give you a lower mortgage payment BUT when you look at the math between the two options… you will see that you will pay a whole lot more on a 30-year mortgage in the long run.
Let’s say you are buying a home that is $180,000. Here is a breakdown between a 15-Year and 30-Year Fixed Mortgage for the same home…..
Now seeing the numbers really is what helped me to see the big difference in the amount of interest paid on a 15-Year versus a 30-Year loan. You save over $84,000 paying for the home using a 15-Year fixed mortgage versus a 30-Year mortgage plus you will own it 15 years sooner!
4) Save For Closing Costs
In addition to saving up for a down payment on your home, you also have to save for those closing costs. Usually, closing costs are about 3 to 4 % of the purchase price of your home. Your lender will give you the specific number for closing day but you need to factor in lets say 4% of the house price for this reason. These fees pay for important steps in the home-buying process, including: Appraisal, Home Inspection, Credit Report, Attorney, and Homeowner’s Insurance.
Using the same number used above for a home priced at $180,000……If you multiply $180,000 by the higher closing cost average of 4%, you will find that you need $7200 for closing costs. Now let’s add that to your 20% down payment amount of $36,000. Together the two equal $43,200. This is the amount you will need to save in order to pay for the down payment plus the closing costs on your first home.
5) Get a PreApproved Home Loan
OK…. so now you have saved 20% for your down payment plus closing costs, paid down your debt and have an emergency fund for those ‘What-if’ moments and now you are feeling confident enough to talk to a mortgage lender. Get a pre-approved loan and a pre-approval letter as this shows sellers that you are a serious buyer and in this competitive real estate market… that is a must and will give you an edge in this competitive market.
To get pre-approved, your lender will need all of the necessary documentation to verify your financial information (proof of income, taxes, etc…) and submit your loan for preliminary underwriting.
6) Find a Home To Buy In The Area You Want To Live
Now is the time to do your home searching. Find the neighborhood and area that you want to live in, and start looking for homes in your price range. Find the homes you like online and then forward those to your real estate agent so they can look into them for you plus it also gives them an idea of what you are looking for so that they can also find you additional listings and homes for sale. Your agent will be able to use a multiple listing service (MLS), like those at Chattanooga TN eXp Realty listings, to find homes that meet your needs.
7) Make a Competitive Offer
Once you have found the home of your dreams… you are ready to make an offer, especially since you already are preapproved for a loan. Talk with your real estate agent to get an idea of what a competitive offer would be on the house you love as they are the experts here. As a first time home buyer you may not be sure of what to bid, so talk with your agent for tips and help as in this competitive market it is crucial to make sure your offer is competitive but that it also remains within your budget and your home’s value too.
8) Prepare for Closing & To Move In!
Once you have been successful in the bidding process and the seller accepts your offer, the closing process begins. The average closing process takes about 43 days, which gives you plenty of time to tackle closing items. Your real estate agent will walk you through everything when it comes to the remaining steps for everything from the home inspection to the final walk through…. and they will keep you informed of any issues that may arise too.
As you get ready to close on your new home, make sure you read every document and ask your agent to explain anything that you do not understand or that you are unsure of….especially before you sign the official contract for the home transaction.
A home purchase is a big purchase, maybe the biggest one you will have made in your life. This is why educating your self and using the proper tools to make sure you know what you can afford when making this big decision is so important. It is equally important to find a professional real estate agent too as they will take the weight off of your shoulders by helping you along the way on your house hunting adventure…all the way through closing.