Buying Your First House

Buying and selling a home can be exciting and scary at the same time.  It is probably the largest asset purchase you will make.  It’s different from other financial investments because you are going to live in it.

At MSA, we have tools and resources for the home-buying process.  Set up an appointment to speak with a Money Coach who can help you through this important decision.

In the meantime, here are some tips to consider:

Tip #1 – Figure Out Your Budget

You need to build a realistic budget.  Start with your annual salary, savings, and what the down payment will be.  There are online calculators that can give you estimates for home affordability. MSA has many online calculators available, including several related to home ownership.

Financial experts may give you various rules to follow.  Our goal is to help you avoid the stress of unexpected circumstances. Most experts recommend that no more than 28% of your income should go to housing expenses.  So, if you earn $5,000 each month, your mortgage payment should not exceed $1,400.  You might be more comfortable with closer to 20% of your income just to be on the safe side.  Depending on your other monthly obligations, it may also leave you money to renovate if needed.

When you are figuring out your budget, remember, the lending organization wants you to have skin-in-the-game, and they will reward you for that.  This generally means that the more you put down upfront, the lower the interest rate, and of course, the less you will owe on the loan.

Lenders look at your Debt-to-Income (DTI) ratio.  That is calculated by looking at your debt and gross monthly income. Most lenders want your DTI at 43% or lower. So, as a first-time buyer, you may want to pay off some debt before you apply for a mortgage.

Tip #2 – Look at All of the Expenses: On-going & One-time Costs

• Principal – The original amount of the loan
• Interest – The rate you are charged for the loan
• Taxes – You will have to pay taxes on your property, in most cases.
• Mortgage Insurance – If you put down less than 20% toward your home purchase, most lenders require that you buy mortgage insurance.
• Closing Costs – These costs can range from 2-6% of your loan amount.  These include legal fees, home appraisal, title insurance and other costs.
• Homeowners Insurance – Protects the structure and your possessions
• Repairs & Maintenance – There will be ongoing costs to prepare for, some expected and often unexpected, like if something breaks.

Tip #3 – Credit Scores Count

Your FICO credit score is really important for you to not only qualify for a mortgage but to get a good rate.  Buyers with at least a 740 score will typically qualify for the best rates.

A government-backed mortgage from the Federal Housing Administration (FHA) requires a minimum score. Visit this FHA website for up-to-date requirements: fha.com/fha_loan_requirements.  Go online to check to see if you qualify for an FHA loan and if it suits your needs.

Tip #4 – Get a Mortgage Pre-Approval

This pre-approval will give you an idea of what you can afford before you start looking for homes. It can make it easier and faster to buy a home.  But don’t think this is the maximum you should borrow.  Sometimes borrowers qualify for more than they can comfortably afford.  It’s a benchmark. You will have to do some homework, but there are basically five steps to follow to get pre-approved:

1. Budget for the down payment (an estimate from the house range you think you can afford)
2. Gather information you will need: income (W-2’s), tax returns for 2 years, expenses, savings (bank and investment statements), debt statements that show balances and monthly payments (including student loans), ID (driver’s license or passport), etc.
3. Comparison shop with lenders
4. Limit your debt and show that you are current on bills
5. Submit your application

Tip #5 – Shop for Mortgages

You can go to mortgage brokers and also check online for the best mortgages and terms. You can also check with banks, credit unions and non-bank lenders.  Interest rates fluctuate, but when rates are low, it may be a good time to obtain a long-term mortgage at a fixed rate.  When rates are rising, it may be risky to do an adjustable-rate mortgage because the rate could rise, also causing the payment to rise.

Tip #6 – The Right Home

When looking at homes, consider more than the house itself.  Look at the overall lifestyle you are buying.  That could include the neighborhood, crime rates, schools, commuting time, amenities in the area, etc.

Tip #7 – Keep Good Credit

Try not to rack up more debt during the underwriting process.  Lenders will check your credit.  For example, don’t apply for more credit cards or make large purchases on your credit cards.  Also, try to avoid changing jobs during this period.

Tip #8 – Don’t Go It Alone

Buying a home requires you to come from both your heart and your head. Do not rush into any decision.  Imagine what life in the house and area will look and feel like.  Your home is an investment, but it’s also the place where you will live and make memories. This is an important decision. For help walking through the financial side of the process and exploring the options, talk with an MSA Money Coach. Call 888-724-2326 today to make an appointment.

Information provided in this article is for informational purposes only and is not intended to offer specific personalized investment, financial planning, tax, legal, or accounting advice. We recommend that you consult an attorney, tax advisor, or accountant regarding your unique circumstances.