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First Time Home Buyer? Tips to Ensure Your Dream Home Fits Your Budget!

What comes to mind when you think about buying that dream home? First, of course, the cost is a good thing. You see, this is one of the most significant investments you’ll make in your lifetime, so you need to get it right. For a first-time home buyer, there’s so much to do during a home purchase, but you should always appreciate the financial responsibility and commitment of owning a home. 

So how do you ensure your dream home fits your budget? The rule of thumb is to “never purchase more houses than you can afford.” What is affordable differs from one buyer to the next, but in this article, I will provide tips and guidance to ensure that your dream home fits your budget. Here we go:

First Time Home Buyer

Assess Your Financial Readiness

Before shopping for your dream home, evaluate your financial readiness by assessing your credit score, debt-to-income ratio, and overall financial stability. Why do these matter?  

  • Your Credit Score

One of the most important factors lenders consider when you apply for a mortgage is your credit score. Your credit score affects your ability to get a mortgage and the loan’s rate and terms. A higher credit score can result in a lower interest rate, saving you thousands of dollars over the life of your loan. In addition, you can obtain a free credit report annually from each of the three major credit reporting agencies: Experian, TransUnion, and Equifax.

  • Your Debt-To-Income Ratio

Your debt-to-income ratio is the portion of your gross monthly income spent on repaying debts, including mortgage payments or rent, credit card debt, and auto loans. Simply put, your DTI allows a mortgage lender to know how much debt you have compared to your income. The DTI helps the lender determine whether you’re financially secure enough to add a mortgage to your monthly debt payments. A higher DTI ratio signals a larger risk that you might not repay their loan. 43% is the highest DTI ratio a borrower can have and still get financing. The lower the debt-to-income ratio, the better the chances you will be approved for a mortgage. 

  • Your Overall Financial Stability

How healthy are your finances as you plan to buy a new home? First, assess your financial stability, including job stability, monthly expenses, and emergency funds. Homeownership involves additional expenses such as property taxes, homeowners insurance, and maintenance costs. Therefore, having a financial cushion to cover unexpected expenses is crucial.

Save for a Down Payment

In a 2020 Millennial Home Buyer Report, nearly half (48%) of all participants admitted saving for a down payment as the biggest barrier to home ownership. You need at least 3% down for a conventional loan. Working with the current median price of existing homes (by the third quarter of 2022), you would require around $11,760 to buy a $392,000 home. Saving such an amount is a herculean task for a first-time home buyer, but there are various ways to do this effectively: 

  1. Set up a dedicated savings account for your down payment. This account should be separate from your emergency fund and other savings accounts. It is essential to contribute regularly to this account and avoid withdrawing funds for non-essential expenses.
  2. Increase your income by taking on a side job or selling items you no longer need.
  3. Cut expenses by creating a budget and reducing discretionary spending.

Explore down payment assistance programs. These programs are designed to help first-time home buyers with down payment and closing costs. It is vital to research and understand the eligibility requirements and program limitations.

Learn about the Hidden Costs of Home Buying

Homeownership comes with hidden costs, including closing costs, property taxes, homeowners insurance, neighborhood homeowners association (HOA) fees, utilities for services like cable, internet, water, or sewage, maintenance expenses, and closing costs.

  • Closing Costs

Closing costs range from 3% to 6% of the home’s purchase price and depend on the purchase price, location, and lender fees. These costs include appraisal, loan origination, title insurance, and attorney fees. Therefore, you must review the Loan Estimate and Closing Disclosure documents provided by your lender to understand the breakdown of your closing costs.

  • Property Taxes

Property taxes are based on the value of your property and are set by the local government. Do background research on property tax rates in the area you are considering purchasing a home because these taxes can increase over time, resulting in higher monthly payments. 

  • Homeowners Insurance

Homeowners insurance is a requirement by most mortgage lenders and covers damages to your home and personal belongings. The cost of homeowners insurance can vary depending on the location, house age, and coverage options.

  • Maintenance Expenses

Maintenance expenses can add up quickly, including routine repairs, simple electrical repairs, paint touch-ups, pool cleaning, landscaping, and unexpected repairs. A financial cushion (at least 1% of the home’s purchase price) caters to the maintenance expenses to avoid financial strain.

Explore Mortgage Options for First-Time Buyers

Mortgage options for first-time home buyers include conventional, FHA, and VA loans.

  • Conventional Loans

A conventional loan is a mortgage loan that is not insured or guaranteed by a government agency. These loans typically require a higher credit score and down payment than government-backed loans. However, they offer more flexibility regarding loan amounts and repayment terms.

  • FHA Loans

An FHA loan is a government-backed loan insured by the Federal Housing Administration (FHA). These loans offer lower down payments and credit score requirements than conventional loans. However, they require mortgage insurance premiums, which can increase your monthly expenses.

  • VA Loans

VA loans are available to eligible veterans and active-duty military members. These loans offer competitive interest rates and require no down payment. However, they need a funding fee and have limits on loan amounts.

Negotiate Like a Pro

Negotiating the price of your dream home can save you thousands of dollars, starting with dedicated research of the local real estate market. You also need to understand the seller’s motivation. So how do you negotiate like a pro? 

  1. Make a firm offer with pre-approval from a lender. This shows the seller that you are a serious buyer and have the financial ability to purchase the home.
  2. Ask for concessions such as repairs, closing cost credits, or a home warranty. These concessions can reduce your out-of-pocket expenses and increase the overall value of your purchase.
  3. Have a backup plan in case negotiations fall through. This can include having a list of alternative homes or being prepared to walk away from the talks.
  4. Be flexible. Negotiation is a give-and-take process, and you should be prepared to waive certain things when negotiating your property purchase. 

Key Budgeting Takeaways for First-Time Home Buyers

Ready to buy into the American dream? Owning a home is a major dream for every American, but it comes with heavy financial responsibility. To ensure you comfortably buy your dream home, start with a budget to help you evaluate your financial readiness. Next, start saving for a down payment early enough, explore mortgage options, and learn about hidden costs. Finally, have a financial cushion and backup plan in case of unexpected expenses or negotiations falling through. With these tips and strategies, you can ensure that your dream home fits within your budget.

Are you a first-time home buyer? Learn the secrets only the top 1% of realtors know with our Ultimate Home Buying Guide and confidently buy your dream home within your budget!

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