When it comes to financial and life goals, buying a house is probably pretty high on your list. But being able to purchase a home depends heavily on your finances being in good standing. That means you don’t want to have too much debt, but you DO need to have a good credit score.
You may be dreaming of shiplap and that modern farmhouse kitchen, but are you financially ready to buy and own a home?
Here, we’ll discuss all the financial aspects of buying a house so you can be sure you’re ready to go house hunting!
1. Know how much you can afford
One thing you’ll learn quickly when house hunting is that your realtor will probably show you a few homes that are way above your budget. That’s because they know many people will stretch to afford their dream home. Avoid this trap!
Your budget for purchasing a home should be based on your income after taxes. When considering signing on the dotted line, ask yourself if you ’re comfortably able to afford the estimated monthly mortgage payments without feeling strained or impacting your other financial goals.
It's a good idea to keep your mortgage payments no higher than 30% of your income and certainly no more than 50%.
2. Have 20% saved for a house down payment
When shopping for a new home, it’s easy to get caught up in the magic and forget about the D-word. No, of course, we don’t mean divorce (or Dallas!). We’re talking about a down payment. Depending on what kind of loans you qualify for, you’ll be required to make a downpayment anywhere between 5% to 20%.
Many lenders won’t loan you more than 80% of the price of the home you’re looking to buy. Can't make a 20% down payment? Expect to pay more in interest. To build up a down payment, open up a bank account specific to saving for your new home, and calculate how much money you’ll need.
Then, build your savings into your budget so that every month you have a plan to save toward your down payment. Doing this will also help you figure out long it will take you to save the money.
If you are getting financial help from family or close friends, you'll need a gift letter for a mortgage that basically clarifies where the funds came from.
3. Know what your credit score is
How’s your credit score? Remember, lenders will look at your credit report and credit history to determine whether you’re a liability or not. So before embarking on the journey of buying a house, check your credit report to be aware of your credit score and also for any errors that might exist.
Statistics show 1 in 5 credit reports have errors on them! So do your due diligence. Work on improving your credit score if necessary to ensure you get the best interest rate.
4. Have all your financial documentation in order
Prepare your financial records, because your lender is going to want to see them in order to approve you for a mortgage. When it comes time to apply for a mortgage, your W2's, tax returns, bank statements, loan statements, credit card statements, and lots more will be on display. So have this documentation handy and current to provide to your lenders when they ask for it.
5. Get pre-approved for a mortgage
Be sure to shop around for a mortgage and determine what type of mortgage works best for you. A fixed mortgage carries the same interest rate throughout, and an adjustable-rate mortgage is one that has a variable interest rate after a certain amount of time has passed.
Inquire about any associated mortgage fees and mortgage insurance and obtain a pre-approval letter to show sellers (and your real estate agent) you are a serious and qualified buyer when you officially start house hunting.
6. Prepare for other associated costs
This one is a biggie! Buying a new home isn’t just about a mortgage payment, ladies! Be prepared to pay for your home inspection, closing costs, and moving costs. Plan to factor these costs into your budget as you save toward buying your new home.
Not only that, there are lots of hidden costs to be aware of as well. I’ve included several below. For instance:
1. Closing costs
You know you’ll have to pay them, but what exactly is included in closing costs? In a nutshell, they are the fees lenders and third parties charge when you buy a home, and they can include:
- Attorney fees
- Inspection and appraisal fees
- Surveys to verify property lines
- Title insurance and title searches
- Discount points (which you pay to get a lower mortgage interest rate)
- Recording fees (to record the purchase in local government records)
- Mortgage evaluation fees
2. Moving costs
In the excitement of buying your first home, it’s easy to forget that moving out of your old home and into your new one is an unavoidable home buying cost. If you rent an apartment and are leaving before your lease is up, you’ll likely have to pay a penalty for breaking the rental agreement. What’s more, professional movers will charge you a fee, often by the hour.
If you choose to do your own move, you still need to consider the costs of packing materials and rental trucks. Depending on how far you’re moving, you may also need to pay for a night or two in a hotel.
3. Homeowners' association dues
If you’re moving into a community with a homeowners’ association, it will be the seller’s responsibility to make sure the dues are paid up until the closing date. After that, dues are your responsibility. Many associations collect their dues monthly or quarterly, so it’s likely you’ll need to pay shortly after moving in. It’s important that you factor that amount into your budget when assessing if a home is affordable or not.
4. Decorating and renovating
It’s very rare to find a resale home that’s decorated exactly the way you want it. Chances are pretty high that you’ll find something cosmetic you want to change right away, whether it’s changing wall colors, replacing window treatments, or ripping out old carpet.
Even if you’re buying a brand-new home, you’ll still have decorating work to do. Starting with a blank decorating slate is exciting, but it can also be costly. New home builders usually don’t include blinds or window treatments of any kind and choose very bland colors for walls.
5. Monthly mortgage costs
You also want to make sure you can actually afford those monthly mortgage payments. Otherwise, you can wind up house poor. Definitely not what you want.
It’s important that you have an idea of how long you intend to stay in a home. Of course, you want a place to call your own, but a home is also a great way to build equity. However, equity takes time to build. If you end up moving after only a couple of years, you may not have built much equity in your home.
Homeownership is great, and it’s definitely something to consider including in your wealth portfolio. But remember, you need to plan accordingly and be ready to stick with it for the long term in order to realize the gains of homeownership.
Once you are all set, you can start planning how to pay off your mortgage early, if you feel so inclined!