There is no way to sugarcoat it: buying a house for the first time is overwhelming. There are many factors you need to consider well before you decide between a split-level rancher or a chic city condo. We’re going to take a look at what’s the best financial advice you’ll need to know before buying your first home so that by the end of this article, you’ll be prepared to enter the housing market for the first time.

Let us begin by asking a simple question that has several complex answers.

buying a home

What can you truly afford to pay?

Cost on paper is nothing compared to the actual costs associated with buying and maintaining a property. You need to factor in these additional costs when budgeting for the big purchase because having just enough for the mortgage will leave you unprepared for the other costs of homeownership.

Property Taxes

If you buy a fixer-upper or plan to do some remodeling soon after purchase, then expect the initial value of your property to increase. There are even cases where homes were undervalued during the initial appraisal, and when the actual value was applied to the property taxes the following year, the annual costs doubled.

Homeowners Insurance

You’ll need to have homeowners insurance to prepare for the unexpected. The national average is $1312 annually for every $250,000, but that number varies dramatically based on location. A homeowner’s monthly premiums in Montana will be much different than premiums in LA.

Closing Costs

Closing costs are the fees you have to pay to the realtor for facilitating the sale. These fees can vary wildly and depend upon many factors, such as the home’s location or the type of realtor you worked with. Closing costs can range anywhere from 2% to 7% of the home’s value and need to be paid at the close of the sale.

Utilities

Utilities are essential to consider when budgeting for a home. How big is the house? How up-to-date are the home’s heating and cooling systems? The wiring and electricity? Even more pertinent, are you considering going solar or using other alternative energy sources?

Maintenance and Repairs

When transitioning from renting to homeownership, one overlooked cost is the repair and maintenance fees associated with owning property. There are the expected costs you might budget for – lawn service or gutter cleaning. However, you will need to have an emergency fund for those ruptured pipes, fallen tree limbs, broken windows, and whatever other event Murphy’s law throws your way.

A good rule to follow is to set aside 1% – 2% of the home’s value per month to start an emergency savings fund. Having an emergency fund to pull from can prevent the need to take out a home equity loan or accumulating credit card debt in the wake of a crisis.

Consider the Location

How expensive will it be to live in your neighborhood? Your home’s value will have this cost factored in; however, your home’s location will affect everything from grocery prices to the cost of gas. You need to know how expensive it is to live in a particular area because those higher prices add up over time.

Simple Question, Complicated Answers

So, what can you truly afford to pay? Perhaps the 3-bedroom isn’t looking as good anymore. You might be able to afford a home on paper, but how thin do you want to stretch your financial resources to maintain a high quality of living in your new home?

What can you truly afford to borrow?

Unless you are one of the few extraordinarily privileged people who can afford a house outright,  you’ll need a mortgage to help you cover the cost of the home. But what goes into a suitable mortgage? How do you ensure you get the best deal? The best interest rate? Are you eligible for any special programs?

If you qualify for an FHA or VA loan, then you can borrow from the government to take out a mortgage. However, if you do not qualify, then you’ll need to use a private mortgage lender.

The Down Payment

You’ll want to try to pay as much upfront as you can. The minimum down payment is usually between 3.5% and 5% of the home’s total value, but you should try to pay more upfront if possible.

Ideally, you should aim to pay 20% or more for the down payment so that you do not have to pay private mortgage insurance. This additional monthly fee is a cost meant to protect the lender, and it can add up. PMI costs roughly $1,000 per year for every $100,000 of your home’s value. You do not need to pay PMI after you earn 20% equity in your home, so the more you pay upfront, the better.

Boost Your Credit Score in the Months Leading up to the Purchase

Your credit score will help to determine the interest rate on your mortgage. You can take steps in the months leading up to the purchase to improve your credit score.

Generally, you want to avoid big purchases and make sure you’re making all your monthly payments. Avoid closing out credit cards or opening new credit cards.  Even a tiny improvement in your overall credit score can lower your interest rate and save you thousands of dollars over time.

Patience Will Save You Thousands of Dollars

It can be tempting to want to rush into what at first appears to be your dream home. The stress of fishing around in the housing market and dealing with high-pressure realtors often pushes people to want to close sooner than later. However, like any big decision, purchasing a home shouldn’t be taken lightly. You need to figure out precisely what you can afford and exactly what you can borrow so that you can make the best financial decision.


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About the Author

Veronica Baxter is a writer, blogger, and legal assistant operating out of the greater Philadelphia area. She writes for the Law Offices of David Offen, who is a successful bankruptcy lawyer in Philadelphia.