Buying a home is the biggest purchase most people will make in their lifetime. While saving up for a down payment may take some time, establishing goals and understanding what goes into the purchase will help you prepare financially for your first home. There are many tips and tricks, as well as federally backed programs to help you reach your homeownership dreams.
The question is, where do you start? Preparation is key. We researched some important questions you’ll want to ask yourself as you start your homeownership journey.
Are You Ready to Buy a House?
The whole process can be confusing, so it’s essential to do your homework and ask the right questions during your home buying journey. Here are a few of the basics:
- Is it the right time to buy a house? Timing is everything! While it may seem like a good idea, you should check to make sure you have a cushion with your finances to handle the ongoing maintenance and repairs. They can be costly! Additionally, suppose you still have plans to travel, go back to school, get married, have a baby, start a business, or other big-ticket items. Your future should be taken into consideration when determining what you can afford — today and down the road.
- Do you have steady income? Even if you determine that you’re ready to buy a home, it’s also essential to make sure you have a solid financial foundation. Having consistent income will be one of the lender’s requirements when you apply for a loan. Homebuyers with employment gaps, multiple jobs, or inconsistent income are less likely to be approved for a mortgage.
- What is your credit score? Your credit score rating can make a big difference when purchasing a home. It will influence whether you’re approved for a mortgage, qualify you for lower payments and interest rates, and provide more favorable loan programs.
Depending on your answers, you will determine whether it’s the right time to purchase a home. Still, if you’re unsure, you can meet with a loan officer at your local bank to explore your options. They can help you create realistic goals and give you tips on how to reach them.
Finances Required to Purchase a Home
Ready to take the next step? Start by talking to a loan officer or mortgage broker about the type(s) of loans you qualify for. The amount and loan type can significantly differ in the kind of house you buy, the location, size, and more.
You’ll also need to understand your budget. How much can you afford? How much of a down payment will you need? What are the expected closing costs? Does the home need repairs? These questions will help you understand the amount you should be saving and where each dollar is allocated. Remember, just because a lender approves you for a higher loan amount than you expected, doesn’t mean you should max it out. Establishing a budget will help determine how much you are able to pay. Do the math and be honest with yourself about how much you can afford while still maintaining a comfortable lifestyle.
As a first-time homebuyer, down payments with an FHA loan can be as low as 2%. Still, suppose you’re using another loan type. In that case, the down payment requirement may be as high as 20%, so make sure you understand the loan obligations before you start shopping.
Remember, a down payment is only one component of the cash you’ll need to close. Closing costs, including loan origination fees, appraisal fees, title searches, title insurance, taxes, and more, can add up to an additional 2-5% of the purchase price, depending on the state you purchase in local taxes and other regulations. In 2020, the nationwide average closing cost for a single-family home was approximately $6,000 with taxes. To learn more about closing costs, read Investopedia’s article here.
You’ll also need to consider other instances in which you will need cash to move.
- Will you need to hire a moving company?
- Are you moving out of state?
- Do you need new furniture?
- Does the home need repairs before you can move in?
- Will you be paying rent and a mortgage while those repairs are made?
The questions can add up, but they are helpful to gauge whether you have enough money saved for the purchase of the home. If a location change is on the horizon, we’ve compiled some simple tips to save you money and make the moving process more seamless in our blog.
It’s easy to forget about interest, but it’s a significant component of any mortgage loan. When you take out a mortgage to purchase a home, you agree to pay a lender a specific amount each month for up to 30 years or until the loan is paid off.
The interest is calculated as a percentage of the loan, either in a fixed-rate or variable rate format. It accrues on the principal balance, adding up to thousands over the years. Your lender will communicate your loan interest rate (typically between 2-5%) to you before you purchase a home. In addition, Bankrate has a mortgage calculator that includes interest rates so you can see how your monthly payment will be divided.
Saving Tips and Tricks
Once you understand what type of loan and amount you qualify for, you’ll want to establish a savings plan, create a timeline, establish a budget, and pay down existing debts. You may even want to take on a side job to bring in extra cash, which you can allocate towards a down payment.
- Establish a Savings Plan and Timeline: To start, create a clear savings goal and timeline. For example, if you want to buy a house within one year, the savings plan may be more extreme than a five-year plan. Be realistic with your timeline and remember that you will be on track to meet your goals if you maintain a healthy budget.
- Use Technology for Budget Tracking: Using budget methods like the 50/30/20 budget rule can help you categorize income and spending to ensure you’re not overextending your finances. Financial tracking apps like Mint or You Need a Budget (YNAB) can help you set goals, track your progress, and tag spending. We have a blog about our favorite tracking apps that will make your life easier.
- Paying Down Debt: Carrying debt, like student loans or credit cards, can make buying a home more complex, so it’s essential to have a payoff plan. If you can, try to refinance for lower monthly payments and a decreased interest rate. The money saved over time can be set aside for your future home.
- Get a Side Job: In a delivery-obsessed world, getting a side gig is easier than ever. Spending a few hours a week driving for companies like Uber, DoorDash, or Shipt can help you put money aside even quicker. So, explore the options in your local area and start driving!
Buying a home is a big goal for a reason. It requires lots of research and analysis but finding your dream home (within your budget!) can be extremely rewarding. To learn more, subscribe to our Slavic401k blog for additional finance tips and tricks.