If you are considering buying your first home, make sure you are prepared for the adventure you have decided to take. With house prices being as low as they are, it is hard not to consider buying a home, but if you have never owned a home before and will be a “first time home buyer,” then please read this. It might just save your from making a big mistake.
Right out of the gate, most people do not know if they can buy a home, meaning does your credit, income and employment qualify you for a home purchase? Your credit score and history is one of the most important things to know and manage if you plan on buying anything that requires a loan. Your credit is also something that you can not just fix in a month or two. Mistakes in payments or planning can take years to correct, so a good knowledge is important. I recommend going to one of the 3 credit bureaus and paying for a tri-merge credit report with your credit score. Once you have done that, spend time on their website and learn about your credit.
The least complex item related to buying your first home is employment. You must have the same job or job type for a minimum of 2 years. Without 2 years of employment in the same job or job type, you can not buy a home with a traditional mortgage loan. For clarificaiton, 2 years in the same job type is sometimes open to interpretation by the lender, where you may feel it is the same type of job, but the lender does not. Another discrepency is those who are self-employed or commission based earners. You will need to be ready to provide additional documentation and your paperwork will be analyzed to a higher degree from someone that has a simple pay structure and stability. The reason for this, is that you are at the greatest risk to default on your loan. Lastly, if you are thinking about making a job change you need to be honest with your loan officer. This change may or may not affect your qualification for the home loan.
Having enough money or income is a requirement for having options, both in daily life and for long term planning. This is also very true when it comes to buying a home. My best recommendation is to have a budget and see if you can stick to it for 6 to 12 months before taking the leap into home ownership, and make sure the payment you are planning to make is part of that budget. Note on the payment and budget, make sure to include taxes and insurance and projected utitlity payments. This will limit true payment shock post purchase.
Closing costs, down payment, appraisal, and home inspection are all costs that you will need to plan for. Your appraisal and home inspection will probably be just under $1,000, but the down payment and closing costs will depend on the mortgage that you qualify for and the terms of the purchase. These are best to discuss with a mortgage officer and real estate agent to be more accurate, but there are many online resources that can help at least ballpark these costs for planning purposes.
You have your credit knowledge, a good employment history, down payment, and you have figured out that you can afford the payment. Do you have too much debt to qualify? This is simple, take your credit report and write down all the payments you have, add the new mortgage payment, now divide by your gross income. If the number is above .55 or 55%, you probably won’t be able to do anything. There are some cases that you can go up to 60% debt to income, but you really need to consider if you are making a good decision with that high of a ratio. Remember the ratio is based on gross income and not net, so 60% is really more like 80% or more of your “net” or take home income.
Now for the wildcard topic, costs of ownership. Let us assume that you did everything else right and you have purchased your first home. Congratulations, but did you remember to plan for all the items necessary to keep up or furnish your new home? Most homes have a yard to maintain, so you will need a lawnmower and a shovel, weed killer, etc… Do you have the money left to buy these items? While you may or may not have enough furniture to make your new house look like a home, do you at least have window coverings, or the money to buy them? Heck, moving in and paying for all the utilities alone can add up.
The biggest items to be prepared for are things that break. You are now the owner and can not call the landlord to come fix it. You can call someone to fix it, but now it is your bill and home repairs can be quite expensive. Just be prepared and do not say you were not warned.
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