Buying a home for the first time is a monumental decision that should not be taken lightly. There are many details, rules, and financial dynamics that need to be carefully analyzed and considered before the first-time home buyer puts pen to paper.
However, all of the financial planning and coordination shouldn’t be considered as a deterrent for first-time buyers, but rather a primer for the amount of due diligence owning a home entails. These five tips for first-time buyers should make navigating the real estate marketplace as smooth as possible.
Know Your Credit Score
Chances are you’re not going to have the money to pay the entire price tag on your new home upfront, and if you do, you probably wouldn’t be reading this article anyway. Most first-time home buyers rely on a mortgage to divide the cost of their home into payments over periods usually exceeding 30 years or more.
Mortgages come with interest payments that are determined by a variety of factors such as how much money you put down and your credit score. Having a score over 720 will generally secure you the best, most affordable interest rates. Before you go looking for a new home, make sure your credit history is up-to-date an accurate.
Resolve Your Finances
Buying and owning a home is a serious financial responsibility and should only be done after you’ve sorted out all other financial obligations and debts. If you can’t afford to pay off large outstanding loans such as education loans or medical bills in full, try to arrange affordable payment plans with your creditors — you’ll need the financial wiggle room to maintain your mortgage payments and also take care of any maintenance needs without incurring additional debt.
Every dollar that you don’t have to spend on past purchases is another you could put toward building your new home into a place you can truly be proud of.
Determine What You Can Afford
One of the biggest mistakes new homeowners make is biting off more than they could chew and letting their new home override all other financial obligations. First, understand how much money you have available at the end of every month after you’ve paid necessary items like car payments, groceries, gas, pet maintenance and anything else you can reasonably predict to occur on a regular basis.
Many financial advisors recommend not paying more than 25 to 30 percent of your monthly household income on mortgage payments, taxes and insurance premiums. If you can’t afford it now, you certainly won’t be able to afford it later—that is, unless you know ahead of time certain changes to your financial situation coming in the near future, like a promotion or inheritance.
Consider Location Carefully
A multitude of factors outside the confines of your new home’s property contribute to its overall value, and should be taken into considering during the home-buying process.
The conditions of neighboring homes, the proximity to goods and services (supermarkets, hospitals, law enforcement), local school quality, and the cost of living in the city itself can all contribute to the price of a home. For example, homes in Houston, Texas benefit from being in one of the few metropolitan areas that have a cost of living lower than the national average.
Explore Your Down Payment and Financing Options
A good rule of thumb to know whether you’re ready to buy a house is if you can save up at least 20 percent of the new home’s value for a down payment. Paying off a fifth of the house upfront will show lenders that you have financial maturity and a reliable income source to make future payments.
Also look into federally backed programs from the Federal Housing Administration. If you’ve served in the military, the Department of Veterans Affairs also has plans that make home buying easier and more affordable.
Buying a new home is a draining experience, both financially and emotionally. But finding the right home, and having the funds to keep it, makes the arduous search all the more worthwhile.
Image via Flickr by 401(K) 2013