How to Buy Your First Home
October 12, 2017
Buying a home is one of the most — if not the most — significant purchases of your adult life. So, you’ll want to make sure you’re really ready.
Here are three steps that’ll help you do that:
Sort your money out
First and foremost, get your finances in order before skipping off to find your dream home. This means understanding your total income and what it can buy.
While there are lots of online calculators out there to give you some quick numbers, approach with caution.
The general rule according to experts is to spend no more than 30 to 38% of your monthly (pre-tax) income on housing costs. This includes all costs involved in homeownership — from monthly loan payments to insurance. But you may need to err on the conservative side if your expenses are high.
Next you’ll need to figure out exactly how much you should have saved.
Sure, you’ll need enough to afford a down payment on the house — typically about 20% of the purchase price. In some cases you might be able to put down significantly less, though you’ll probably be required to pay mortgage insurance as well.
But having a down payment isn’t enough. You may also need savings to cover a couple months’ worth of mortgage payments that the bank will expect to see, plus enough to cover home insurance and possibly mortgage insurance, and also closing costs — between 2 to 5% of the purchase price — before you get to the closing table. Plus, you want to make sure you have enough to buy furniture, still pay your monthly expenses, and cover emergencies, too.
While that sounds daunting, a little careful planning can get you there over time. Budgeting is a big part of the process, so allocate what money you’ll need by setting up a savings account toward getting your future house.
So where do you find the savings?
If you’re living paycheck to paycheck, it’s time to get comfortable and take a close look at your budget to figure out where you can cut back. Financial planners recommend sitting down with a professional to look through your finances and form a game plan. Elizabeth Miller [president at] Summit Place Financial suggests living in a low-rent apartment to save for the down payment on your future home.
“Save any extra income — put aside bonuses or incentive payments you earn,” says Miller.
This interview with Liz Miller originally appeared on CNNMoney. Click here to read the full article.