Homebuying: 5 Facts You Need to Know

Homebuying: 5 Facts You Need to Know

Preparing for the homebuying process is critical. Not only does it ensure that you’re financially ready, but it reduces the stress and anxiety that comes with house hunting. When you’ve done your research and prepped your budget, you’ll feel confident going into the process, allowing you to truly enjoy looking for your first home.

By Jessica Thiefels

Homebuying Costs Can be Expensive—Budget for Them

Buying a home is expensive, and you start spending right away, even before you sign the dotted line on your closing papers. As you prepare to buy a home, prepare for the expenses of:

  • Mortgage application fee
  • General home inspection
  • Various home inspections, from sewer to roof
  • Closing costs

Research the fees for your region to get a clear picture of how much this will, or could, cost you from start to finish. If you don’t have that much saved, start here.

Saving for the homebuying process

Save money for home costs. All photos from iStock.

The Pre-Approval Process Takes Time. Start Early

Pre-approval is critical as you begin your search for a home. This process involves a significant amount of paperwork (income, debt, and other financial pieces) and takes up to six months. In some cases, real estate agents won’t even show a home to someone without this pre-approval, so start now.

One more step, even before your pre-approval, is to get your finances in order. “You want to ensure you can prove you’ve been gainfully employed for at least a few months; most lenders want to see 30 consecutive days worth of paystubs, and it’s always advantageous to have more. If you’ve had some trouble keeping a regular income or job, it might be best to hold off on the house search until your earnings are more stable,” suggests Kali Hawlk of Magnify Money.

You Don’t Need to Put Down 20%

Traditionally, homebuyers put a 20 percent down payment on the home. However, the vast majority of Americans are living paycheck to paycheck, dealing with debt, and can’t find enough room in their budget to save, according to CNBC. That means putting down 20 percent is nearly impossible in some areas of the U.S.

While it’s recommended to put down as much as you can, buyers can go as low as two percent. There is one caveat: you’ll have to pay for PMI (private mortgage insurance). The good news is that this monthly PMI payment is often minimal, making it possible to put down what you can afford, and manage to pay your PMI in addition to mortgage and homeowners insurance.

However, it’s not the best option for everyone, as the payment is often $30 to $70 for every $100,000 borrowed. Details like this are critical to deciding if PMI is right for you, so get more information in this extensive PMI Resource Guide. When you’re aware of what to expect, you can make a more informed decision.

Your Pre-Approval Amount Isn’t the Magic Number

Sometimes your pre-approval amount is more than anticipated. While exciting, this doesn’t mean you should start looking for more expensive homes. This can make you “house poor,” which means you end up spending the vast majority of your income on your home each month, with little else to use on living expenses or put into savings.

It’s also important to consider this as you look ahead at your life and the potential income changes you’ll experience. Kelly Phillips Erb, a Forbes staff writer, shares a personal experience she had with this:

“When my husband and I bought our first house, we were approved for a mortgage of about three times more than we ultimately ended up spending. Fresh out of law school and working for established firms, our finances looked good on paper. But we dialed back our expectations because we weren’t convinced that our income and expenses would remain at those levels. We were right: two years later, we started our own business just as the economy turned south. The less expensive house meant that we could still make our payments even with less income in pocket.”

How do you make sure you’re buying a home you can afford for the long haul? Phillips Erb explains, “Some lenders suggest that you can afford mortgage payments totaling about one third of your gross income but others suggest closer to 28 percent for housing-related costs including mortgage, insurance and taxes.”

Homeowner Expenses Add Up

Most renters pay some utilities in addition to rent. But when something breaks, you call your landlord to fix the issue, leaving your bank account untouched. As a homeowner, however, you’ll likely be paying more utilities—many landlords don’t charge for trash services or water bills—in addition to being the landlord, who has to pay for anything and everything that breaks.

Some homeowners may also need to pay HOA (Homeowner Association) fees, which range from $200 to $400 each month. Finally, you will need homeowner’s insurance.

It’s wise to estimate your monthly expenses before starting the homebuying process so you can budget properly. This will be an important factor to consider when determining what price range you can afford.

Be Prepared

Homeowner prep requires a lot of research and financial planning. Keep these tips in mind as you start to think about buying your first home. With everything in order, you’ll go into the home buying process feeling confident and ready. You’ll also be more likely to find something you can truly afford—that you also love—which makes homebuyer prep a critical first step.

About the Author

Jessica Thiefels has been writing and editing for more than 10 years and is now a professional freelancer and consultant. She’s worked with a variety of real estate clients, and has been featured on Forbes and Market Watch. She’s also written for Inman, House Hunt Network, Homes.com and more. Follow her on Twitter @Jlsander07 and connect on LinkedIn.

Leave a Reply

DON'T MISS OUT! Get Texas Home and Garden email updates. SIGN UP