Buying your first house is an exciting time. The process of doing research on different neighborhoods, going to open houses, putting in offers and finding your dream home is so much fun. We bought our first home in 2015 and my brain is still wired to check out EVERY house I drive by with a “for sale” sign in the yard – it never really leaves you. But how do you know when you’re ready to commit to the largest purchase you’ll ever make? Let’s look at answering some of these basic questions and see what will work for you.
Our first home
If you’re tired of paying your landlord every month and ready to invest in property of your own, start by asking yourself a few questions:
- How is my credit score? This is one of the first thing lenders will look at and it reveals a lot about you. Make sure you are paying down your debt and correcting any errors on your credit history before house shopping. You are allowed one free credit report a year from annualcreditreport.com.
- What monthly mortgage payment can I afford? Your housing costs should be no more than about 30% of your monthly income. For example if you make $4,000 a month, your mortgage, including insurance and taxes, should not be more than $1,200. This should leave a comfortable amount of room in your budget for the rest of your monthly expenses.
- Do I plan on living in the house for 5 or more years? Earning equity in a home takes time and you don’t want to have to sell the house in a few years before you’ve had a chance to earn any. Selling a home can also be expensive due to realtor fees and closing costs. You may want to find a place to call home and set some roots to make this big investment.
- How much do I need for a down payment? The traditional answer is 20 percent, but lately many of my friends have done less than that and instead opted to pay the private mortgage insurance, which protects the lender from losing money if you end up in foreclosure. You will pay more each month since you didn’t have that 20 percent down payment, but you’ll have to decide what is best for you. Personally, I felt more comfortable putting 20 percent down, but that also meant I had to start saving earlier.
It’s important to take your time and not rush into any purchase too quickly. Evaluate all your options and make sure you’re able to answer these four questions before you sign on the dotted line.
What are your biggest concerns when buying a home? Let me know in the comments below.