Are you a first-time home buyer here in Midland, Texas?
Buying a home for the first time is a thrilling experience and we are here to make this process as enjoyable as we can.
From the mortgage application side of things, the best way that we can make this process smooth and enjoyable is by explaining some of the biggest tips that will help you along the way.
With that said, here are some amazing tips that every first-time home buyer should know:
Am I Ready To Buy A Home?
The best way to ensure that your first-time home buying experience is a memorable one is by ensuring that you have financial security prior to starting the home buying process. This takes out the nervousness in “Am I financially ready to buy a home?”
To help you with this, its time to do a financial analysis to see if you are even in the right position to buy a home before you even contact a mortgage company.
Start Financial Analysis:
Going over a financial analysis will help you to determine what your are spending money on and what is going to take to afford a home.
This is a very easy thing to do and should only take a couple minutes.
Step 1: List current living expenses
List out your monthly expenses associated with your current house or rental situation.
For example list out:
- Rent: $800
- Renters Insurance: $25
- Utilities (gas, water, electric & trash): $200
Monthly expenses: $1,025 per month
Step 2: Research new monthly expenses
Research the cost of home ownership of the home in the price point that you are wanting to buy. For example, let’s go to Zillow’s mortgage calculator and click advanced.
Enter the details of the following: Home Price, down payment and the interest rate.
For example, if you are wanting to purchase a $200,000 home at 3.721% interest with 5% ($10,000) down for 30 years, then here is an estimate of your new monthly expenses with home ownership:
- Mortgage (Principal & interest): $877
- Propery Taxes: $200
- Home Insurance: $67
- Private mortgage insurance: $120
- Utilities (Gas, water, trash, electric): $300
Typically the utilities in your home will be a little more expensive since you have more to maintain.
This brings us to a total monthly expense of: $1,564 per month.
As these are estimates, you will need to go through to see what your expenses are and compare them to what your desired mortgage price point would be.
Step 3: Financial comparison – Renting VS owning a home
Compare the differences of the monthly expenses for your current living situation to that of your new projected home ownership monthly expenses. In this example there is a $539 increase in expenses every month.
Tip: To see if you can live at your current standard of living, or something that you would be comfortable in, try setting aside $539 for the next 4 months (without touching it), to see if you can truly afford the increase.
If, after the four month period you feel it wouldn’t affect your standard of living, then you may be ready for home ownership.
Step 4: Emergency Fund – Set aside $$$ for home repairs
The last sentence we mentioned a huge word… did you catch it?
We said… you “May” be ready for home ownership. Buy why?
Even though you think that you may be able to handle the increased monthly costs of home ownership, you must not forget that home ownership comes with quite a bit more than just paying your monthly bills.
Unlike renting, when you own your own home, you will now have to pay, out of pocket, “When” something breaks.
This is where outlining your financial analysis is crucial. The last thing you want to do is to stretch yourself so thin when you purchase a house only to be immediately hit with a huge expense the month after you move in and the furnace goes out.
What’s the perfect strategy for when to buy your first home?
The perfect strategy prior to buying a house would be to save 3-6 months of expenses in a separate savings account prior to buying your first home. Keep in mind that this is NOT a part of your down payment either!
Using our previous example of the $200,000 mortgage, $10,000 down and $1,564 monthly expenses. Add up all of your additional monthly expenses like food, other debt, car payments etc. If after adding up all of your additional expenses your total comes to $2,500 / month, then you would need to have $7,500 – $15,000 in additional savings. Or 3 – 6 months expenses saved.
This would give you $10,000 in your house down payment fund AND $7,500 (minimum) in your emergency fund. Plus your traditional savings accounts.
Step 5: How much house can I afford?
A good rule of thumb is to make sure that your mortgage is no more than 25% – 30% of your net household take home pay. So if your net household income is $5,000 per month, the recommended mortgage should be around $1,250 – $1,500 per month.
Staying conservative and keeping your mortgage payments to no more than 25% of your income will allow you to have money left over to save for retirement, kids college and extra house costs like roof replacement and other upkeep.
Summing up the financial analysis
Why do we mention to setup your finances in this order? So “When” an emergency happens, you don’t have to put it on a credit card because you weren’t prepared. Going into a house unprepared financially, is the fastest way to additional unnecessary stress to the situation.
To get around this, you need to have a plan. This strategy will take all of the stress out of: “Can I afford this house”. Once you setup your finances to handle the monthly mortgage, expenses and other bills, you will be able to confidently say “I can afford it”.
First Time Home Buyer Credit Analysis
Best Credit Score To Get The Lowest Interest Rates:
Your credit score will help in not only ensuring that you qualify for a mortgage, but also help you to get a lower interest rate on your mortgage.
You can check your credit score for free at CreditKarma.com as well as through some credit cards that you may already use. So login to your credit card account online to see if they post your FICO, Equifax, Experian or tranUnion credit score.
Credit scores range from 500 – 850 and the higher credit score you have the less risk you pose to mortgage lenders. Thus giving you a lower mortgage interest rate.
Here is an outlook of how credit scores are viewed:
- 750 – 850: Excellent Credit
- 749 – 700: Good Credit
- 699 – 650: Fair Credit
- 649 – 600: Poor Credit
- 599 or lower: Bad Credit
Here is an example of the credit score requirements that have been approved over the past four years.
This isn’t to say that if you can’t get a mortgage if your credit score is under 690 you can’t get a mortgage. We’ve seen mortgage applications accepted from borrowers with a 550 credit score and a minimum down payment of 10%.
If your credit score is lower that you expected, or you would like to increase it in order to get a lower mortgage rate, here is a great article on how to increase your credit score in 3-12 months.
First-Time Home buyer Credit Report:
If you don’t already know what your credit report looks like, now is a great time to head over to Annual Credit Report to get a free credit report.
When you get your report, you need to check to see if there are any discrepancies with any of the accounts listed. If so, you need to contact the financial institution in order to get it resolved and taken off your credit report.
Here is a great article on how to dispute errors in your credit report.
Increase Credit Score
If your credit score isn’t as high as you would like it to be in order to get the interest rate that you desire, it would be beneficial to consider doing a little bit of credit repair.
We mentioned disputing errors in your credit report, and that is a fabulous way to get started in credit repair, but it’s also beneficial to work on setting a new trend in good credit moving forward.
So if your credit score isn’t as high as you’d like it to be, here are a couple tips to drastically improve your credit score:
- Pay off all credit cards you can. But DO NOT close the accounts
- Start paying all credit cards on time every month for at least 6 months. Setup automated auto-draft to help pay on time.
- Keep all credit cards under 10% of card’s limit.
If your credit score is below 600, here is a great article on how to increase your credit score in under 12 months.
First Time Home-Buyer Wrap-up
Everything that we’ve mentioned in this article isn’t mandatory to qualify for your first mortgage, but to give you the most information that we can to ensure that your comfortable moving forward with purchasing your first home.
If you would like more information on qualifying as a First Time Home buyer, click the button below. We’d love to chat further about your plans and goals.