Navigate Your Way Home: 8 Vital Financial Tips Before Buying Your First Home - Frederick Real Estate Online (2024)

Buying a home is probably one of the biggest purchases most people ever make. It is certainly an important part of a life-long financial plan. If you’re thinking about becoming a homeowner, there are nine considerations before buying your first home:

1. Your Creditworthiness

Is your credit healthy? In today’s mortgage environment, solid lenders are interested in your credit history. If you have more than a couple of blemishes on your report, some lenders may still provide you with a loan, but you may just have to pay a higher interest rate and fees.

Remember that the mortgage interest rate is the biggest influence on home affordability.

You can request a free copy of your credit report from each of three major credit reporting agencies – Equifax, Experian, and TransUnion – once each year atAnnualCreditReport.comor call toll-free1-877-322-8228.You are entitled to one free credit report per year.

If you have low scores or very little credit, you can work with a credit specialist to enhance your scores to the level that will help you not only be able to apply for a mortgage but get better interest rates. [we have recommendations for credit counselors]

2. Determine How Much You Can Afford

Before buying your first home it is critical to understand how much you can afford, or, more accurately, how much the bank will lend you. To determine how much home you can afford, you can to online and use a home affordability calculator to get a rough idea of how much home you can afford. Be aware that the results will only be a general figure which may or may not be very accurate. Good calculators will give you a range of what you may qualify for. Then you’ll need to call a lender to get pre-qualified and get a more accurate loan limit. This will also give you an estimate of what the monthly payment will be. Contact us for a list of preferred lenders.

The advice that buyers get varies. Some advise not to borrow as much as you qualify for because it’s wiser not to stretch your financial boundaries. The other school of thought says you should stretch to buy as much home as you can afford because with regular pay raises and increased earning potential, the big payment today will seem like less of a payment tomorrow.

Another piece of advice is determined by what the local market is doing. If buyers are in a hot seller’s market where they know that they will have to offer more than the list price to win a bidding war, they will need to plan accordingly. They need to shop in a lower price bracket than their maximum affordability. This will assure that they have enough to offer more than the list price.

This is a decision only you can make. Are you in a position where you expect to make more money soon? Would you rather be conservative and fairly certain that you can make your payment without stretching financially? Make sure that whatever you do, you are comfortable with it. Consult a financial adviser before buying your first home to see how home ownership fits your long-range goals.

3. How long do you plan to live in the home?

While no one has a crystal ball, take some consideration of your employment before buying your first home. If you buy a home and get a job transfer or decide to move after only a short time, you’ll probably end up paying money to sell it. The value of your home may not have appreciated enough to cover the costs that you paid to buy the home and the costs that it would take you to sell your home.

The length of time that it will take to cover those costs depends on various economic factors in the area of the home. In a normal market, most parts of the country have an average of 3-5% appreciation per year. In this case, you should plan to stay in your home at least 5-7 years to cover buying and selling costs. If the area you buy your home in experiences an economic upturn, the length of the time to cover these costs could be shortened, but the opposite is also true.

4. How long the home will meet your needs?

What features do you want in a home to satisfy your lifestyle now? What about five years from now? Depending on how long you plan to stay in your home, you’ll need to make sure that the home has the amenities that you’ll need. For example, a two-bedroom home may be perfect for a young couple with no children. If they start a family, they could quickly outgrow the space. Therefore, they should consider a home with room to grow.

Could the basem*nt be turned into a den and extra bedrooms? Could the attic be turned into a master suite? Will you have money to do renovations, to the best of your knowledge? Having an idea of what you’ll need before buying your first home will help you find a home that will satisfy your needs for several years.

5. Where the money for the transaction will come from

Most homebuyers will need some money for a down payment unless using a VA loan, which requires no contribution from the buyer. There will also be some closing costs.

With today’s range of loan options, having the often quoted amount of 20% for a down payment is not always necessary. FHA loans require a 3.5% down payment, making them a top choice for first-time buyers. There are conventional loans for 10%, 5%, or even 3% down.

Some loans allow contributions from parents, some have lender grants attached. There are government programs, like the Maryland Mortgage Program that offer down-payment assistance. Your lender should have various options for you to consider.

In some cases, seller contributions are allowable. If that is necessary, make sure your buyer’s agent knows that upfront, so they can do their best negotiating for you. [contact us for buyer representation]

6. The Ongoing Costs of Home Ownership

Maintenance, improvements, property taxes, and home insurance are all costs that are added to a monthly house payment. If you buy a condominium, you’ll have a condo fee. If you buy in certain neighborhoods, a monthly homeowners’ association (HOA) fee might be required. If these additional costs are a concern, you can choose neighborhoods without these fees.

Some other costs to consider are utilities like electricity, water, and gas. Maybe you paid those costs in rent previously, but consider that they may be higher depending on the type of home you buy, where it’s located, and whether you have city amenities or county.

If there are items in the home that will need replacing or updating, having a good home inspector to guide you through those items is invaluable. They can give you a good overview of the systems and appliances of your home and help you get realistic expectations as to their life expectancy. That way you can budget and be ready for those expenses.

The amount a person should budget for home maintenance can vary depending on the size and age of the home, as well as the specific maintenance needs. However, a general rule of thumb is to budget around 1-3% of the home’s value per year for maintenance and repairs. For example, if a home is valued at $300,000, a homeowner might budget between $3,000 and $9,000 per year for maintenance. It’s important to note that this is just an estimate and individual circ*mstances may vary.

Make sure to do your research before buying your first home. Your lender and your real estate agent should be good resources for the information you need to make the best decisions.

7. Take a Practice Run

Spend a few months practicing the budget you will live on when you own a home. This includes the mortgage payment, money set aside for repairs and replacements, other expenses of owning a home, like insurance and property taxes, and various other expenses associated with homeownership. Before buying your first home, you will get a good idea of how it will feel to live with the expenses. This will help tremendously when you are deciding how much you are comfortable with spending on a home.

8. Consult A Financial Planner

You may want to consult with an accountant or financial planner to help you decide how a home purchase fits into your overall financial goals. As Realtors®, we are not financial advisers, nor is any content on our blog to be considered financial advice.

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Chris Highland
eXp Realty
301-401-5119

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