Congratulations, you have made one of the biggest decisions of you life, you have decided to buy real estate. But now what do you do? Regardless if this is your first buying experience or if you are looking for your next home , unless you are an investing doing this for a living, it can be very overwhelming.
Let’s start with the basics, do you know what you can afford? How much are you planning to put down? What do you finances look like?
Affordability - When was the last time you did a budget? We need to get down and dirty with your take home pay and expenses to find out what is a good monthly payment for you. Yes you will want and need to get a pre-approval letter from a lender, it will give you the MAX your income will allow you to potentially get approved for a mortgage for. However, don’t make the mistake of blindly assuming that, that is the home price you should shoot for. The mortgage company doesn’t take into consideration your financial goals, lifestyle choices or future obligations (such as taking care of an elderly parent or sending a child to college), only you can do that.
So, what does your budget look like? If you haven’t done one ever or in a long time, the first go around will be time consuming, but think of it as a long term investment. The more you know about your financial situation the better your living situation can be. The last thing a good Realtor wants if for their client’s home to own them, instating of you owning your home. In over words, don’t get up house poor just becasue a Realtor or Mortgage Lender said you can “afford” a certain price. How much do you spend on groceries, eating out, Target runs? What do you like to save in addition to a 401K? How much do you like to spend on hobbies and vacations? All of these should be taking into account when deciding what to spend.
Lastly do you have an emergency fund of at least 3-6 monthly worth of money to cover expenses in an early accessible account? Home ownership isn’t just the monthly payment. Roof leak? That’s you! AC busters? You too! Pool Pump need to be replaced? You guessed it, you! Now, if you are properly insured, yes, that will help minimize your risk, but if your roof is old and needs to be replaced, that’s not something your insurance will pay for.
How Much Are You Putting Down? - Depending on how much you plan on putting down, will determine the house you can afford. Anything less than 20% down will require Private Mortgage Insurance. Less money down, means higher monthly payments and PMI (private mortgage insurance). Although PMI doesn’t break the bank typically, it is an added expense that doesn’t go towards your principle mortgage amount. It will go away once your loan to value ratio is higher than 80%, but you will have to reach out to your lender to get this removed. They are not checking this for you. We will go into mortgage choices on a later blog, feel free to drop your questions so I can best help direct you.
There are VA loan options and FHA options, however, make sure you are working with a knowledge Mortgage Loan Officer so you know what you are getting yourself into with those. There are additional cost with those loans that don’t go away the entirety of the loan, unlike PMI.
When determining down payments and affordability, make sure you ask what are the “Costs To Close” and not just your down payment. Closing costs on the buyer’s side are typically 2-3% of the price of the home. For example, you are trying to buy a home for $300,000 with 10% down. If you think you will only need $30,000 at closing, you will end up short. Closing costs will be around $9,000 for a home that price, so to close you will need to produce $39,000. If you don’t have that extra money too close, you will either need to put less down, see if you can get a seller to contribute to buyer closing costs or find a home that is listed for less.
At the end of the day, remember that mortgage companies are looking at your gross monthly income, not your take home pay. Those can be very different numbers. Don’t forget, a budget isn’t designed to suffocate you. Its purpose is to give you permission to spend your money, but it ensures you’re spending/saving your money how you really want to. Check out this budget example here. Work we a Realtor that is interested in make sure you won’t be house poor. Ready to make a move?
Contact me today, let’s get you owning.
