Being a first time home buyer is guaranteed to be one of the most exciting times in your life. On the other hand, it can also be extremely overwhelming, especially if you’re staring at your bank account wondering how much you can comfortably and reasonably afford.
If you’re planning on buying a home, then understanding your financial status and health is crucial. The home buying process can be very complicated, which is why we put together this list of five steps you should take to prepare your finances for buying a house.
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This may seem like a no-brainer, but it’s often one of the first steps people often overlook when deciding to purchase a house. Before you write a check for thousands of dollars, it’s important to decide if you’re financially in the position to make such a big commitment. Buying a home is likely the biggest purchase you’ll ever make, and you don’t want to start your journey as a homeowner by biting off more than you can chew.
- Do you have any remaining credit card debt or student loans?
- Have you saved enough for a down payment?
- Do you have a steady, reliable job that provides enough income for future payments? Banks would need to see your paystubs in order to consider you for a loan.
- Do you know your credit score? Banks normally consider applicants with a good average credit score.
These are all questions you should ask yourself before deciding to buy a new home.
In addition to the loan, you’ll also need to put down a certain percentage as a down payment. Most experts would recommend putting down anywhere from 10% to 20% of the home’s purchase price. The more savings you have available at your disposal, the lower your monthly mortgage payments will be.
You may want to contribute more to your savings several months or years before buying a house. Nowadays, this is easier than ever with apps like Qapital, which allows you to set aside part of your paycheck to meet your down payment goal.
You should also consider extra costs that you’ll need to pay upfront when you purchase a home. That includes closing costs, additional fees (for title companies and lenders), and moving expenses (truck rental, movers, boxes, and packing materials).
- Calculate How Much You Can Afford to Buy a House
Once you’ve decided to move forward with the home buying process, then you’ll need to figure out how much you can afford to spend on a home. Just because the bank is willing to give you a large loan doesn’t mean you’ll be able to pay it off each month!
That’s why you’ll want to work with a lender. They’ll verify your financial information prequalify you for a house. Once approved, you’ll have a pre-written letter that shows potential sellers that you’re serious and qualified to get a loan if your offer is accepted.
Keep in mind, the bank will determine how much they lend based on a number of factors, including your credit score, debt to income ratio, and how long you’ve been at your job. We recommend using a software tool like Moneyspire, Acorns, or one of these other budget apps to keep track of your savings and finances.
- Read the Fine Print on Loan Rates
When buying a home, it will be very exciting to get preapproved for a loan, although you should consider some major things before moving forward with the purchase. It’s in your best interest to look for a fixed-rate conventional loan, which means your interest rate will stay the same throughout the entire loan term (compared to a variable interest rate that can rise).
As a first time home buyer, you’ll also want to determine how long you’ll be paying off your loan. If you have the means to pay more each month, then a 15-year term would be better than a 30-year term.
- Look for Investment Growth
Although you may be looking for a permanent home where you spend the rest of your life, you should always have the home’s resale value in the back of your mind. In the rare chance that you decide to sell or move, then investing in a property with a high resale value means you might walk away with a hefty chunk of change.
Look at buying a home in a desirable location with other high-valued homes located in the area. Having a good foundation and layout is also important, as those are two things that likely won’t change over the next few years. Don’t stress too much about small features like paint color or old appliances. One efficient visit to Lowe’s can help you easily take care of paint and any replacements you need to make! If you’re planning to renovate and sell your house later, Lowe’s can also help with that through some of their financing installation services!
As you can see, buying the perfect house is all about preparation and financial planning. It’s worth saving up enough money and putting in the extra effort beforehand, so you can relax and enjoy being a first time home buyer.
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