Purchasing a home is likely the largest investment you’ll ever make, but it’s not always an easy one. Buyers need to be informed and have their finances in order before entering the market.
Here are what experts say first-time buyers need to know:
- What You Can Actually Afford
Before buyers begin their house hunt, it’s essential they know how much amount they can afford to spend. “Start with a plan, and don’t let your imagination take over,” advises Jim Parrish, a personal injury lawyer in Manassas. “Letting what you see in your friends’ houses control your budget is a recipe for disaster.”
Buyers list out all of their monthly expenses, without leaving out items like groceries, and transportation spending, and others like nights out and gym memberships.
A general rule of thumb is that: housing costs shouldn’t take up over 30% of your before-tax income.
However, the percentage can vary, especially if you’ve other debts, like car payments or student loans.
Overspending on monthly housing payments can leave the homeowners poor, and unable to meet other expenses—like saving for retirement.
It’s common in competitive markets, for buyers to get pre-approved for financing so as to get more customers. But just because a bank approved you for a given amount, it doesn’t imply that’s what you should spend. Just stick to a price limit you are comfortable with.
- You Need a Buffer
Although it may be tempting to spend everything you have, at your offer to stay competitive, it’s advisable to have at least some balance after you budget for a home.
It’s recommended you have at least 3-6 months worth of money in savings by the day you become homeowners. One of the reason is that you’ll be needing emergency savings now more than ever.
Therefore, if a home purchase renders you with no liquidity, consider lowering your price point or waiting to increase your savings.
- The Actual Cost of Owning a Home
The down payment usually tends to be the biggest financial challenge of owning a home. But there’re many other costs, which pop up along the way: origination, appraisal, notary fees, and a credit report can all add up.
Note that the costs don’t seize just when the keys are handed over. There is a need for new furniture and costs like utility payments and lawn care, which former renters might not be familiarized to paying.
- Renovations Aren’t as Seen on TV
Buying a fixer-up might enable you to afford a home in a more desirable area or snag a bigger one, but there can be some consequences.
Just know that it’s always more expensive than you’re imagining or what you see on television. If a home needs renovations, always factor it into the total cost of buying the property.
A private loan is usually an option to finance this project but can be hard to secure, especially after taking out a mortgage.
If your home requires far more than you purchased it for, then you could have the option of tapping your equity to assist in paying for renovations.
Additionally, there’re some mortgage options, which include renovation expenses. For example, a 203k FHA loan enables homebuyers to finance the purchase and rehabilitation on a single mortgage.
You can borrow from a friend or family member as well. Just be cautious of your relationship status if you end up defaulting on the loan!