Buying your first home comes with all the emotions — from the excitement of finding your perfect forever home to the nerve-racking experience of handing over your life's savings and taking on a large debt. And there's no Master Class for preparing for your first or any home buy. We chatted up Mint.com's CFP Brittney Castro, who walked us through the financial checklist for making sure you stay within budget. "This is really important because it will make sure you don't stretch yourself too thin and get into something we call "house poor," where all your money goes toward the house and you have nothing left for other goals or retirement," says Castro. Here are 10 steps for making a smart investment.
1. Know How Much You Can Afford. Before you fall for that 4 bed, 4 bath dream house, start by taking a good look at your budget. "Determine what bills you have, what your rent is now, how much more you could afford in the mortgage payment and other housing costs, which should include property taxes, home insurance, and maintenance and repairs," says Castro.
You can get a good estimate of what the mortgage will be from most real estate sites or use an online mortgage calculator and decide if you can swing it with your annual budget. "We talk a lot about budgeting and following the 50, 20, 30 rule of thumb," says Castro. That means you should dedicate 50 percent of your budget for fixed bills, 20 percent for savings, and 30 percent for fun stuff or variable expenses. "Out of that 50 percent, the guide is typically no more than like 28 percent of that is for your housing costs," she adds.
2. Start a Home Savings Account. If you're not quite at your home budget goal, you can open a home savings account to earn more interest than you would on a checking or regular savings account. "Because goals of a home down payment are usually five years or less, we suggest opening a savings account versus maybe investing in the stock market because that comes with more risk. You just don't know what the market will be five years from now when you want to buy the home."
This is also a good idea if you want to start saving for home repairs in case, for example, the roof breaks or if you don't have taxes and insurance embedded in your monthly payments.
3. Get Pre-Approved. Interest rates are low right now, which is a great time to lock in a mortgage rate. That said, you want to shop around for the best mortgage rate and loan. Castro recommends a locking in a 30-year fixed rate (where the interest rate doesn't change over time so no financial surprises) and that you're putting enough of a down payment (20 percent recommended) to not have primary mortgage insurance, or PMI. "Technically, you could get in the home sooner by putting down 5 percent because you won't have to save as long, but you just have to factor in there's going to be an additional monthly cost," she says.
Once you have your pre-approval, you'll be able to start searching with confidence knowing that you have the financials backed up (and the seller will feel confident too). FYI, here are the forms you'll need to get your mortgage approval:
- The last two years' worth of your tax returns
- Pay stubs or proof of income for the last two months
- All bank statements, plus brokerage and investment account statements, for the last two years
- Proof you have cash for the down payment and closing (or a gift letter if your parents are helping you)
- ID like a driver's license or passport
4. Find a Realtor You Trust. Shop around for a local realtor too; someone who really understands the market in the area you're looking *and* someone you feel comfortable representing you. This is a big moment in your life at not a small expense so make sure the person guiding you through it feels like the right business partner.
5. Start Your Search. Here's the fun part, and usually step 1 for many. But it's important to cover 1-4 first to avoid disappointment and wasted time. Also, it's easy to fall in love with a home online. But set reasonable expectations for seeing it in person (those wide-angle lenses can really make a difference) and take the time to explore the neighborhood, day and night. Balance out what you'll need to repair on a fixer vs. choosing something turnkey in your budget range. And think for the long-term, how you'll grow into it vs. what you need right now.
6. Make an Offer. Congrats! You found your perfect home. Now comes the negotiating. Once you make an offer with the help of your agent, you'll have to put down what is called earnest money, to show that you're serious about your offer. This can be anywhere from 1 to 3 percent of the purchase price and goes into an escrow account (and will go toward the purchase of the home at closing). But note: if the deal falls through because of a problem on the seller's end, you get your money back, but if the problem is on your end (because you can't get financing), you may have to go to court to recoup it.
7. Get Financing. You may not get final approval on your loan until right before closing but you'll start the process once an offer is accepted. There's a lot of back and forth here as the lender determines whether you're worth the risk.
8. Order Your Inspections/Appraisal. You'll want to order a home inspection to make sure there are no surprises that will cost you later. This can also help with the negotiation process if there are issues like electrical or plumbing that weren't clear when you made the initial offer. As the buyer, you pay for the inspection and your realtor can help you schedule it.
9. Buy Home Insurance. You'll need to be approved for home insurance in order to finalize the loan approval so start that process ASAP.
10. Close (Yay!). The big day is here! You're officially a homeowner. So proud. On closing day, you'll sign a crazy amount of paperwork and your financing will be approved and ready to go. You'll also score the keys to the house! Before the final day, make sure that you have a certified check or scheduled a wire payment for your down payment and closing costs, you've got your homeowners insurance set up, and you have your ID with you. Congrats and happy decorating!
Photos 1, 2 by HiveBoxx on Unsplash
Photo 3 by Shutterstock
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