A home is probably the most expensive purchase you will ever make in your lifetime, until you buy your next home, which may be even more expensive. The real estate market in the U.S. is hot right now despite the pandemic. Home ownership still remains a major goal for people wanting to live the American Dream. If done right, owning a home can be a great way to build wealth long term. 

Here are six things that are important for first-time homebuyers to know:

Start by Preparing to Take Out a Mortgage Loan

 

The first thing you need to do is determine what you can realistically afford in a home. Your dream home may be out of reach or you might find that you can afford a larger home than you actually need. How much you can afford in monthly mortgage payments will depend on what your assets are worth, the amount of debt you have, your income, lifestyle, and spending habits.

You also need to find out what your credit score is. If your credit score is low, you will likely be required to pay a higher rate of interest on your home loan. This will drastically affect the total cost of buying a home.

 

How Much You Qualify for vs. How Much You Want

When speaking to a mortgage broker, they can tell you how much money you qualify to borrow. The formula is 43% debt to income. Translated, that means that if you add up all your debt payments, including the mortgage, it can be as much as 43% of your gross income.

 

Many who go that high feel the squeeze when faced with paying taxes and household expenses like food. So, be careful that you don’t put yourself in a bind that keeps you from going on vacation or just dining out with family or friends.

How Much Money Should You Put Down on a House?

The standard for down payments has historically been at least 20%. First-time buyers often end up buying a home with a minimal down payment. However, it may not be wise to make a larger down payment either.

This all has to be worked out in advance by talking to your Realtor, your lender and family members who may want to help. But if you can’t find a way to gather the down payment, you really aren’t ready to own a home.

Saving for a Down Payment

If you have a good idea of what homes that meet your criteria in the area you prefer cost, you need to start saving up. The higher the price of the home, the more you will have to put down.

Does a 30-year Mortgage Make Sense?

First-time homebuyers tend to be younger, so most are comfortable with a 30-year mortgage. Shorter term mortgages are usually cost prohibitive for first-time buyers. But they can save you quite a bit on interest and allow you to pay your mortgage off faster.

 

 

Will Your Budget Allow for a Larger Payment?

If you are considering buying a home, my advice would be to try and save money every month equal to the difference between the rent you’re currently paying and what you estimate your mortgage payment to be. You also need to add estimated taxes and insurance to that amount. If you can do this for up to a year and still cover emergencies and other unexpected expenses, you are in good shape to buy a home.