10 Steps to Take Before Buying Your First Home

Are you planning the purchase of your first home? Buying a house is a major decision because the house will soon become one of your main financial assets. Plus, you’ll be making mortgage payments for a long time.

 Take these steps before you buy:

1.     Ask yourself if you’re financially stable. Have you had your job for at least five years? Do you have a reliable income?  Do you have an emergency fund with at least 3 most of living expenses saved (this will save you if you become ill and can’t work or you lose your job).  Do you have sinking funds for upcoming known expenses such as insurance deductibles, taxes, car registration fees, Christmas, and birthday gifts, saving for a new car?  Make sure you have these pieces in place before proceeding with your new home search.

2.     Consider other costs.  You have saved for a down payment.  You have your emergency fund and sinking funds in place.  Do you have money for moving costs, move-in costs (all the things you need to do before moving in – painting, buying appliances, curtains, or updates and repairs that need to be made)?  Have you factored in the savings you will need to buy lawnmowers and garden tools, and snowblowers if you live in a snowy climate?  What about new furniture or that fence you need to put in the backyard for your dog to be safe?

3.     Are you ready to make monthly mortgage payments for at least ten years? Are there any other major expenses in the near future that would make keeping up with your mortgage payments difficult?

4.     Do you plan to stay in this house for at least five years? The first five years of mortgage payments usually only cover fees and interest. Are you ready to settle down in one spot.

5.     Raise your credit score. You can qualify for a mortgage with a credit score of 580, but you’ll have to spend more on fees, interest, and your down payment. You’ll get a much better deal if you wait until you have a credit score of 700 or above.

6.     Look at your debt to income ratio. This is a good way to tell if you’re earning enough to afford a home. Ideally, the expenses linked to buying a home shouldn’t exceed a third of your income. Add up your mortgage payments, utilities, HOA fees, property taxes, and expected repairs.

7.     Save money for your down payment. You can buy a home with a down payment of anywhere between 3% and 20% of the value of the home. The more you can afford to pay, the lower your mortgage payment will be. Putting down 20% will avoid PMI. 

8.     Plan for expenses for maintaining your home. Don’t make the mistake of comparing a mortgage payment to a rent payment.  Homes come with lots of extra expenses.  You should count on spending at least 3% of the current value of your home on maintenance each year. Create a saving fund to cover these costs.  In addition, you will have things like landscaping costs, and likely higher utility costs.

9.     Try out your anticipated mortgage payment.  If you’ve got all the pieces in place, it might be wise to try out the anticipate new mortgage payment (and associated costs like HOA fees, homeowner’s insurance, higher utilities, etc.) for a few months before you make a final decision.  How does it feel to live with the added expenses?  Is your budget too tight?  If so, it doesn’t mean you have to ditch your dream of owning a home, just that you may need to rethink how much you can really afford.

10.  Look for the right house for you. It’s best to wait until you can afford something better if you don’t find anything you like. Take the neighborhood and its development into consideration when buying a house, since these aspects will influence the future value of the house.  Location, location, location.

Buying a house is a very important decision. Becoming a homeowner means that you’re taking a big step on the path of financial stability, and you’ll want to be prepared for this step so that you don’t regret your purchase because you become “house poor” and are not able to do the fun things you are used to doing.

Buying a home requires careful planning. Ask yourself how much you can afford to borrow, what kind of mortgage would be best, and what kind of home would be adapted to the unique needs of your family. Take the time to go over your income, boost your credit score, and make a list of what to look for in your ideal home before you start your search.  Keep your budget front and center, and don’t be talked into more house than you can comfortably afford.