No really, I feel like I was just renting my first apartment yesterday. And if you are currently in my shoes (sick of throwing thousands of dollars away on rent each month with nothing to show for it) then you are probably wondering the same thing as me. Now what?
Well, the good news is, I sat down with a broker and got all the answers to decide if I was really ready.. so you don't have to. So here is everything you need to think about and do to get through the home buying process.
Budget
This part should be somewhat obvious, but in case it isn't, you need to ask yourself, "Can I afford a home?" This gets a little more complicated than just making your monthly mortgage payments, because you are probably already paying a monthly rent anyways. This gets into the question of.. can you afford everything that comes with buying a house. and not just today, or this year, because you can't easily switch into a new house with a lower payment like you can move apartments to lower your rent. Can you truly afford the cost of this home for the next 5, 15, 30 years?
To answer this question let's dig into what it really costs you to own a home.
Part 1: The Down Payment
When buying a home, the general convention is to put 20% of the price of the home down as a payment (this is called your equity) and then take out a loan (a mortgage) to pay for the remaining 80% of the house. Depending on different incentive programs, there may be the opportunity for you to put down as little at 3% if you are a first-time home buyer, but you should dig into that with your mortgage specialist.
This means you probably need to have a really big chunk of change saved up to secure your dream home. If you do, you are ready to move on to the next step.
Part 2: The Mortgage
How much home can I afford? This part takes a look at home much you can spend in total on the house by taking into consideration the down payment and the loan. There are plenty of mortgage calculators out there that you can use to guess this part. But your absolute best best at this stage is to get a pre-approval from a bank. A pre-approval allows a bank to dig into your finances and credit to give you an idea of the size of the loan they would potentially be willing to give you. This is NOT a guarantee you will get the mortgage. There could be something they find and don't like when you actually apply for the loan. But it is a pretty good determinant, and sellers love to see that you have been pre-approved when you make an offer.
Part 3: The Closing Costs
Closing costs are fees you pay to the lender for the processing of your mortgage. They pay for services like home appraisals, searches on your title and a host of other fees. They do not include your down payment. Both buyers and sellers have to pay closing costs, but usually the buyer pays more. It can be hard to guess closing costs because it depends on the type of mortgage you take, but you can typically expect them to be between 3-6% of the value of the home. That's another pool of cash you have to have at the ready.
What many don't know, is that if you are struggling to come up with the cash, closing costs can be negotiated. By negotiating what is called "seller concessions" you can ask the seller to pay a portion of the closing cost. There is a limit on how much they are allowed to pay, only a certain percentage of the mortgage amount.. but it is better than nothing.
Part 4: Property Taxes & Insurance
They say there are two things in life that are always certain... death and taxes. Of course, it is no different here. Depending on the state you are buying in, you need to account for the percentage of taxes that you will have to pay annually.
Additionally, be prepared to work homeowners insurance or mortgage insurance into your calculations. Homeowners insurance protects you from the potential financial loss you could suffer if something happens to your home. It is not required by law, but most banks require it in order to take out a mortgage. Also, in many cases, if you are putting a very small percentage of the value of the home as a down payment, most banks will also require mortgage insurance, to protect against your inability to make your monthly payment.
Part 5: Home Owners Association Fees
The next fee to be weary of is the potential home owners association fee that you typically pay if buying an apartment or a house in a fancy neighborhood. These fees cover communal expenses ( building maintenance, the gym, doorman, landscaping etc.) and could be so high it is as if you are paying rent on top of your mortgage anyways. These tend to increase with inflation over the years, and when something major breaks (like a roof or heating system). they could jump even higher. There isn't much you can do about this except actively search for places with no, or very low, fees from the start.
Part 6: Maintenance
Last but not least, maintenance seems to be the cost that everyone forgets about. When the faucet drips, the deck starts to break, or the roof gets a little bit leaky.. you don't have a landlord you can call and complain to anymore. You are your own handyman. So you either need to be incredible at DIY home projects, or have a healthy savings account to cover the wear and tear that life brings to what will probably be your biggest financial asset. Generally speaking, you can estimate between 1%-4% of your home's value in yearly maintenance.
So as you can see, rather than only having to think about a monthly fixed rent payment, buying a home involves a far larger range of costs that need to go into your decision making. If you decide you're ready, walk into a bank and sit down with a mortgage advisor to take the first steps. Good luck finding something in this current housing market though.. I will cover that topic in my next post....
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