Are you looking to prepare for homeownership?
Buying your first home can be intimidating if you don’t know where to start. You’re probably thinking about your credit score, down payment, and what type of mortgage you should get.
Homeownership is great, but you have to make sure you are prepared before getting started. Buying a house is one of the largest purchases you will make in your life. Renting is fine but homeownership should be the ultimate goal.
You may feel that buying a house is impossible. Well, we're here to tell you that it’s not.
That is to say, use the following tips to prepare for homeownership.
Let’s get started.
Know your budget
The first thing you will quickly notice when buying a house is that it can become expensive and out of budget. You may have a realtor who wants to show you homes that are way out of budget.
This is simply because most realtors know that many people will stretch their budgets to buy their dream home. Avoid this approach at all costs!
Before knowing how much to budget for your home purchase, you have to first be on a budget. If you haven’t created a budget, follow these steps to create a detailed budget:
- Calculate your after-tax income
- Calculate your monthly expenses
- Choose a budgeting system
- Write it down and execute it (your spouse too! If applicable)
- Revisit and adjust as needed
After that, you should base your home purchase on your income. Always choose a comfortable mortgage payment and don’t buy a house for a certain amount just because you were approved for it. A lot of times mortgage companies will approve you for more than you can comfortably afford.
It’s the best approach to keep your mortgage payment no higher than 25-30% of your take-home pay. That includes the principal, taxes, insurance, and homeowner's association fee.
Related reading: Budgeting 101: How To Create A Budget
Know your mortgage options
It's important to know your options when you prepare for homeownership. There are many types of mortgages. For example, you have a VA, ARM, FHA, & USDA mortgage. Most of them are designed to get you into a house regardless if you can actually afford it.
Now that we’ve addressed your housing budget you know how much house you can afford.
Let’s talk about what type of mortgage you want to choose.
You want to get a 15-year, fixed-rate conventional mortgage to save the most money on
interest and fees when buying a house.
This is the best strategy versus choosing a 30-year or variable rate mortgage. You will see the difference when you sit down and calculate the amount of money you are saving by choosing a 15-year vs 30-year.
Always stay conservative when choosing a mortgage and you will be just fine. Our experience buying a home was unique and it came with a lot of unexpected things. But, here’s a great article on how we bought our first house.
Understand the differences between prequalified and preapproved
Being prequalified and preapproved are not the same thing. This is important to know when you prepare for homeownership.
A mortgage pre-qualification is a quick estimate of how much a house you can probably afford. This is according to the lender and not your actual home budget.
It doesn’t take long for the lender to get a quick estimate. They only need a few items such as your name, phone number, income, assets, and debts. A prequalification gives you a big picture of how much you can afford when buying a house. It’s best to get this done at the very beginning of the process.
A preapproval is handled a little differently and is the step above pre-qualification. This process is more thorough of your income, credit history, assets, debts, and rental history.
This will give you a more exact idea of how much house you can afford, according to that specific lender.
The lender will take time to verify the information you have provided such as employment and the amount of debt you have.
As stated above, it’s best to get preapproved when you know you’re ready to buy a house. But please keep in my you will probably be approved for more than you should actually spend on a house.
Prepare for associated costs
There will be costs associated with buying a house that you may not be aware of. The most important one of them all is a down payment. You will need to put down 20% to avoid private mortgage insurance (PMI). So, if you are buying a $200,000 house, you need a $20,000 down payment.
PMI can increase the cost of your monthly payment so do your best to save up 20%.
Another item you will have to pay is closing costs. These are basically the fees lenders and third parties charge when you buy a home. It can include attorney fees, inspections, appraisals, title insurance, etc.
The excitement of buying a house can make you forget about the moving expenses involved. You could potentially have to pay a penalty to break your lease if you’re renting. Also, a fee for a moving truck or company to move your things to the new place.
Choosing to do your own move may be cheaper but you will need to purchase packing materials such as boxes and tape.
Lastly, moving into a new community may include paying a homeowner’s associate fee. It becomes your responsibility the day you move into your house. Many associations collect monthly dues but some can be quarterly or even yearly.
Final words – how to prepare for homeownership
In conclusion, buying a house is exciting and an awesome accomplishment. However, being prepared for homeownership is most important.
These tips will help you be better prepared for the day you move into your new house and enjoy homeownership.
What other homeowner tips would you add to the list?