There are many important steps to buying your own home, and it’s a big decision to make the leap from renting to buying. This article will help you navigate the process and decide whether it makes financial sense for you to buy a house. We are going to cover how to afford a house if you are a first time home buyer. We will also go over how to use a mortgage calculator so you can determine if you can afford a house in your desired neighborhood. When you compare buying vs renting, it is important to run numbers to see if buying a house is a wise investment strategy for your particular situation. This article is designed to walk you through the steps to help you make this important decision.
In this post, you can expect to learn…
– How to use a mortgage calculator to see how much your payments might be
– What buying vs renting means for you as an investor
– Tips for buying your first house, what to do before becoming a home owner, and more!
Continue reading the full post here…
How to use a mortgage calculator to see if you can afford a house
There are many important steps to buying your own home. One of the most helpful places to start is to learn how to use a mortgage calculator to see if you can afford buying a house as a first time home buyer. Click on this link to try out a mortgage calculator now.
Using a mortgage calculator is pretty simple. You simply plug in your desired down payment, interest rate, and the number of years to pay off the home loan.
Then you hit submit, and it will reveal a monthly mortgage payment.
Compare this monthly mortgage payment to what you pay in rent
Now that you have the monthly mortgage payment, compare it to what you are paying in rent each month.
– Compare buying vs renting with this handy calculator!
Don’t forget that with buying a house, you will have additional monthly expenses that you may not have with renting, such as paying for water, trash, electricity, gas, and sewer.
When you own a home, you will also be responsible for repairs and upkeep such as landscaping as well.
What buying vs renting means for you as an investor
Many people think buying a house is a great investment, but for some people, this just isn’t the case. The extra costs of owning a home can actually eat up a lot of your income that could go towards saving money in investment accounts. However, you can also turn buying a house into an investment. You could purchase a home that needs a little work, live in it while you work on it, and flip it when the house value has increased. Or you could buy a small starter home and then turn it into a rental to create passive income. Check out this post to discover our best tips for buying a house to turn it into a rental property.
It’s important to look at your particular situation and know your goals so you can create the best plan of action.
There are some benefits to buying a house which should be factored into your decision. For example, you might be able to write off the interest portion of your mortgage payment on your taxes. You should consult a tax person or CPA for help with tax matters.
There are also some major drawbacks to buying a house such as having all of your extra income go towards paying the mortgage and taking care of the house. This might leave you with little money at the end of the month to invest in savings and retirement accounts.
What are some tips for how to afford a house if you are a first time home buyer?
Here are some tips for first time home buyers who plan on buying a house with a loan.
Step One: Know what you can realistically afford as a first-time home buyer.
Run your numbers with a mortgage calculator and take a look at your budget. When you purchase a home using a loan, many banks will make sure you are within the limits of what you can truly afford. They use a calculation called a debt to income ratio to determine whether you can afford buying a house. You can go use a debt to income calculator by clicking here to discover your ratio.
Step Two: Save for a down payment.
Down payments vary depending on the price of your house, but try to save up at least 20% of its total cost. Putting 20% down actually makes you more competitive in a seller’s market. A seller is more likely to choose you if it looks like you have more “skin in the game.”
You don’t necessarily need 20% down if you are a first time home buyer. You can often qualify for a loan with just 3 to 3.5% down. But if you don’t put 20% down, you may end up having to pay PMI (private mortgage insurance) on the loan. This is just an added expense to you, but it acts like insurance to the bank just in case you stop making payments on the loan.
The best way to save for your down payment is to start budgeting it into your monthly expenses. Click here to use this free budget calculator to help you see where your money is going and create a plan to pay down debt, grow your savings for your down payment, and hit your financial goals!
Step Three: Improve your credit score and clean up your credit.
When you have a high credit score as a first time home buyer, not only will you look more desirable on paper to sellers, you will have a better chance at qualifying for a home loan as well. With a score in the high 700’s or in the 800’s, you will have a better chance at competing when there are many buyers vying over an offer.
Spend a little time studying your credit by using a free service such as Credit Karma or Credit Sesame. These credit monitoring services do not provide you with your real credit score, but they do give you access to everything listed on your credit. If anything looks out of the ordinary, you can contact one of the three credit bureaus to order your free once-a-year credit report.
If you have issues to resolve on your credit, you can reach out to a credit repair company to help you clear up any problems. They often address issues quickly so you can increase your credit score and look more desirable to sellers. Click on this link to get access to a free evaluation and start resolving outstanding credit issues.
Step Four: Understand the housing market.
It’s important to know whether you are you in a buyer’s market or a seller’s market when you are ready to purchase a home as a first-time home buyer?
One way to tell if you are in a buyer’s market is if there are many houses available for sale. When there is a higher supply of houses, the prices tend to level off or come down as buyers are not as active.
If it’s a seller’s market, you might find that there are hardly any homes on the market and every time one comes on the market, it becomes a feeding frenzy as many buyers try to win the home with their offer. This drives the price of the home up and can sometimes make it difficult to find a home in your price range.
What’s important to know is you have the advantage in a buyer’s market. If you are a first time home buyer, and you are stuck in a seller’s market, you want to make sure you have 20% down, you are prequalified, your credit is clean and high, and you move quickly on an offer.
Step Five: Understand what type of mortgage is right for you.
There are two main types of loans: fixed-rate and adjustable rate, so you’ll need to decide which is best for your needs.
Fixed Rate Mortgages – These benefit to fixed rate mortgages is they remain unchanged until they expire in 30 years or less.
Adjustable Rate Mortgages – These loans will change based on a pre-determined index. Adjustable rate mortgages can fluctuate so it’s important to know this going into one.
Step Six: Get prequalified for a specific amount to show sellers you are serious.
When you go through the prequalification process, a mortgage broker will help you run numbers to see what you can qualify for. It’s important to look at these numbers and compare them with your budget to see if you feel like you can actually afford the mortgage payments.
Also remember there will be other expenses associated with buying a home, such as utilities (water, electric, gas, trash, sewer, etc.). These expenses can add up quickly, so it’s important to decide whether you can afford this regardless of whether a mortgage broker or real estate agent says you can.
A tip for if you are in a seller’s market while getting prequalified… try to qualify for a little more than the asking price of the home. For example, if the house is selling at $500,000, and you are in a seller’s market, meaning things are very competitive, you might want to get prequalified for up to $525,000 so you can offer more if the price starts bidding up.
If you need advice about getting prequalified, consult with a mortgage broker. You can work with an online company or work with a local mortgage broker to get prequalified.
Step Seven: Find an agent you like, discuss your needs and criteria, and start your search for homes you can really afford.
You might have already been using an online service to search for available homes in your area, but many times, these services are lagging in real time availability. When we are in a seller’s market, often these online services do not show an accurate status of the homes you are interested in.
This is why it’s important to find an agent you like working with so you can discuss your home buying needs and criteria. The agent will send you listings so you can take a look and decide whether to go take a look inside the home.
Make a list of your criteria (for both your partner and other family members who will live with you), and give this to your agent so they can filter out the homes that are not a match.
Step Eight: Look for your dream home, shop around, and put in an offer
Shopping for a home can be the funnest and most frustrating part of the home buying process.
It’s exciting to look at homes and find something you like. And it can be downright depressing when you put in an offer only to find out someone with an all-cash offer swooped in and grabbed the deal.
If a seller doesn’t accept your offer, don’t give up! This is actually pretty common in today’s fast moving market, and many people get discouraged when their offers get rejected time and time again.
Keep searching and placing offers. Find an agent you like and ask him or her to send you listings that match your criteria as soon as they pop up on the MLS (multiple listing service). This will give you a head start and provide you with a list of potential homes to work through as you make your decision.
Step Nine: Get a home loan.
Before looking, carefully research the types of loans you can get and find out which ones have the best rates. Take advantage of any offers for low or no-down payment loans that may be available in your area.
Once you have found a house that matches your needs, and you’ve placed an offer, and it’s been accepted, it’s time to let your mortgage broker know so they can start the escrow process.
Final thoughts on deciding whether you can afford to buy a house as a first time home buyer
The key to making a decision about whether you can afford to buy a house is to take the time to run your numbers!!!
Use the free calculators in this post to your advantage and make sure you feel comfortable with allocating a large portion of your income towards a home purchase.
Buying a home can be a great investment for your money, but it’s important to take all your options into consideration. Later down the road, you might be able to turn the house into a rental property or potentially sell it for more if the housing values increase over time.
We hope you enjoyed this article about being able to afford a house if you are a first time home buyer!
Let us know in the comments if you have questions about buying your first house!
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