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Purchasing your first home can feel as daunting as it is exciting – it’s likely the largest investment you’ll have made, and there are a lot of things to think about as you make your way through the buying process. This and related posts will hopefully demystify much of the buying process and provide you confidence when making decisions toward buying your first home!
Planning
Before you start cruising online listings or attending open houses, it’s extremely important to do some upfront planning. This will reduce guesswork down the line and help you feel comfortable in making decisions. First, determine what attributes are important for your new home to have. What style home are you looking for – a condo or house? Do you need extra space for a growing family? Is the neighborhood important? Distance to work? Prioritizing these kinds of aspects is a helpful first step. This is also a great time to think about some longer-term questions. How long do you want to be in a certain area? What are your professional plans? These questions could sway your decision as to whether now is the right time to buy a home versus renting. The costs (and potential headaches – does anyone enjoy moving?) involved with buying a home are really only justified if you plan to live there for at least 3-5 years.
Then comes the quantitative side of the equation. How much home can you afford? Some detailed budgeting of your monthly expenses will help you determine how much you can safely spend on mortgage payments. There are tons of home affordability calculators online, but here’s one we like: Bankrate Home Affordability Calculator. The site allows you to plug in other expenses, like car payments, which are important to include in your budgeting. A helpful rule of thumb is your total debt expense should not exceed around 1/3 of your total income (before taxes).
It’s also important to think about savings – the more you put down on your home, the lower your ongoing payments will be, but that comes at the cost of reducing your savings safety net. We recommend most clients have an emergency fund of 6 months-worth of living expenses to help insure against a surprise job loss or unexpected health or home expense.
If you are fortunate enough to have additional family funds to assist in your home purchase, we recommend open communication to ensure everyone has a common understanding. Are you receiving a gift or a loan? If a gift, it’s important for the gift-giver to understand the tax implications. If the agreement is for a loan to be repaid, it’s important to document your agreement and abide by generally acceptable guidelines in forming the loan parameters. More information on intrafamily loans can be found in this article: Intrafamily Loans
Beyond making sure your budget works out, there are a couple other preemptive steps you can take to prepare for a successful home purchase. First is to check your credit score, which plays a huge role in the interest rate you’ll be able to secure on your mortgage. If you are buying a home with another person, the lower of your two credit scores will be considered for financing. There are credit repair solutions available to help clear blemishes from your report if there are factors weighing down your score.
You should also collect the necessary documentation that will be used in securing your mortgage. This will likely include paystubs, a couple years’ worth of W-2 forms or tax returns and a few months of bank statements. Finally, beware of doing anything that might change your financial situation, like buying a new car, opening a new line of credit, or changing jobs.
Once you’ve addressed each of the areas of this post, you’ll be well on your way to confidently buying a home! In the posts to follow, we’ll explore more around financing options, how to close on a home, and what to do after you’re all moved in. If you have any questions about your particular situation, please feel free to reach out to your advisor!