Buying a home is like trying to find the perfect confluence between your family’s financial situation and your lifestyle. Of course, most of us would take a country estate with vineyards and a Roman-inspired pool if we could afford it, but the fact is, the vast majority of us can’t foot that type of bill.
If you’re searching for your first home, there are ways to ensure you get the most amenities for your money. My first home buyers plan boils down to four must-follow tips.
Qualifying for a Mortgage
This needs to be the first step for all first home buyers. Why? Because until you qualify for a home loan, you won’t have a baseline budget to start your search for your dream home.
The mortgage qualification process hinges on your complete financial picture. Lenders will want to know how much money your family makes, plus how much debt you carry. This comparison of your debt-to-income is known as your DTI ratio. On the front end, lenders want to see housing-related debt — things like mortgage expenses, homeowner’s insurance, and property taxes — that comprise no more than a third of your gross income; on the back end, all your debts — everything from housing to vehicle and student loans to court-ordered child support — should make up no more than 41% of your income.
These DTI numbers help determine the size of the home loan you’re qualified to receive. For example, say your family’s gross monthly income is $6,000; in order to stay under that 33% front-end DTI ratio, your mortgage (including escrow) should be no more than $2,000 a month. If you have large amounts of non-housing debt, that back end DTI ratio may knock your buying power even lower.
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How Much You Can Afford?
Once you’ve been approved for a home loan, you may think you’ve already answered this question. But the fact is, just because you’ve been approved for a $250,000 mortgage doesn’t mean you should max out the money the lender’s giving you.
Here’s a perfect example. Before the housing bubble burst, it was common practice for lenders to hand out home loans the borrowers couldn’t truly afford. My husband and I found ourselves in just such a situation. During the application process, we were approved for a $400,000 loan. We weren’t comfortable with that number — we knew there was no way we could afford the mortgage payments, which would have been more than $3,500 a month — and made the decision on our own to buy a house less than half that amount.
There’s no right or wrong answer to this question, but settling on a budget that makes sense for your family takes a lot of foresight and discipline.
Deciding What Home is Right for You
Houses, like home loans, come in all shapes and sizes. There are split levels and ranches, two-story colonials and condos. Since the housing bubble burst, the average size of homes in the U.S. has been on the decline — as have sale prices — meaning you’re likely to get more bang for your buck now than you were a decade ago.
I always suggest first home buyers do some research before they start viewing prospective houses. In addition to knowing their budget, they should also know things like:
- Whether their ideal home is in an urban, suburban, or rural location
- Whether their ideal home is located in a neighborhood
- What type of floor plan works best for their family’s lifestyle
- Any specific amenities they require, such as handicapped-accessibility
- How many bedrooms or bathrooms they need
- What lot size they’re comfortable with
- The amount of square footage they’re comfortable with
- Whether the house needs a garage, and if so, how many spaces
- If they’re ok with a home that needs work, or if they want a move-in ready property
While there are changes you can make to just about any home, certain factors — like location, lot size, and basic footprint of the home — are pretty much fixed. If you wouldn’t buy a home with a tiny lot, don’t bother viewing one. If you do, you run the risk of falling in love with a property that won’t really work for your family’s lifestyle and making a purchase you may later regret.
Finding the Right Help
As soon as you start the mortgage application process, you’ll have a choice to make: whether to work with a financial institution that largely markets its own mortgage products or a mortgage broker, who will be able to introduce you to a wide variety of home loans. In both cases, you’ll be working with a financial professional who must follow state and federal guidelines; but when you work with a broker, you may have more flexibility to explore different home loan options.
Additionally, you’ll also have to choose between working with a real estate agent or shopping for a home on your own. When you buy a home, you are not responsible for paying your agent’s commission; in other words, there’s really no reason not to work with a real estate professional. You’re more likely to have to choose between a real estate agent and a Realtor. Both must have specific certifications and licenses to work in the industry, but the main difference is that Realtors are members of a national trade association and have access to that association’s resources and network. Otherwise, there’s basically no difference.
While there are a lot of decisions that first time home buyers must take into consideration, hopefully this guide will get you headed down the right path to finding the home of your dreams.