Buying your first home or thinking about buying it is an exciting time. You have dreams and plans for your new home. Buying a home is one way to grow your wealth and stay in the middle class. A house you buy today is sure to be worth significantly more in 20 years. Whether you're picturing your life in a Tudor, Cape Cod or ultra-modern condo, there are some basics you need to know about buying a home.
How Much House Can You Afford?
Before you meet with a real estate agent, you need to know how much you can afford to spend on a home. But how do you determine that? The general rule is that your mortgage payment shouldn't be more than a third of your monthly income. You need to make sure to consider additional costs, such as insurance and property taxes.
For example, if you make $36,000 per year, then your monthly payment shouldn't exceed $1,000 per month. You can use a mortgage calculator to help you find out how much you can afford when you add in your down payment. You should strive to put a 20 percent down payment on a home purchase.
You can find help to afford a down payment or skip it entirely. The U.S Department of Housing and Urban Development (HUD), FHA, VA, and USDA loans offer various programs for you to explore.
You also need to consider other expenses that go with home ownership. Things, such as maintenance and repairs, are expenses you must account for in your budget. When the air conditioning goes out in the middle of August, you can't call the leasing office or landlord anymore. You must call an HVAC professional and pay for the repairs.
Why Do Interest Rates Matter?
Your interest rate might not seem like a big deal, but it can cost or save you a lot of money over a 30-year mortgage.
For example, let's say, you're buying a home for $200,000 with a 20 percent or $40,000 down payment, so the loan amount is $160,000. If your interest rate is five percent, then over the 30 years of the loan you pay $149,209.25 in interest. Now, if you have excellent credit, and receive a three percent interest rate on the same loan, you pay $82,843.92 in interest over the loan period. The difference is $66,365.33 over the next 30 years, and that's why interest rates matter.
It's a good idea to check your credit score before applying for a mortgage. There are many online websites that allow you to check your credit score for free. Go over the information carefully and dispute any info that isn't correct. You may consider paying off debt to improve your credit score and receive a better interest rate.
What Do You Need to Apply for a Mortgage?
When you apply for a mortgage, you may find that you're pre qualified for a certain amount. What exactly does that mean? It means that the bank, mortgage company or credit union believes that it will loan you based on the information you provided but it isn't a guarantee. Once you choose a lender, you must provide proof of the information you provided for final loan approval.
- Paycheck stubs
- several years of W2s
- bank records
- proof of how you saved your down payment
- utility bills
- other debt information
- the address of the property
- a valuation of the property
- and more
Buying your first home is an exciting time and a little daunting but you can do it! You can get your information sorted before applying for a mortgage and buy a home that fits comfortably within your budget.