5 Financial Musts For First Time Buyers

Buying your first home can be one of the most exciting events in adult life. In many ways, it’s our society’s primary marker of adulthood, a symbol of financial prudence, and the ultimate sign of stability. But without the right planning, buying your first place can be fraught with stress, fear, and way too much guesswork. Here are five financial prerequisites that, are musts before you sign on the dotted line.

1. Bank a Large Enough Down Payment. Common ranges are 5% to 20%, with anything less than 20% requiring buyers to carry private mortgage insurance (PMI) to protect lenders against loan default. Your down payment should be large enough to make the resulting mortgage manageable month-to-month, even if there’s a temporary financial hiccup. Remember, every dollar you save toward your down payment is one less dollar you’ll need to borrow and one less dollar you’ll be paying interest on for the next 30 years.
2. Know How Much You Want to Afford. Ask yourself, “What kind of lifestyle would I like to have after I purchase my home? What level of mortgage debt am I comfortable with?” Consider your other financial goals and calculate just how much money you’re willing to devote to your mortgage, mortgage insurance, property taxes, and association dues. Lenders are great at telling us exactly how large a mortgage we can afford based on factors like our down payment and debt-to-income ratio. But I think there’s a second, much more important equation — how much do we want to afford?
3. Cut Your Consumer Debt. Regardless of what debt-to-income ratio your mortgage company allows, strive to drastically reduce or entirely eliminate consumer debt before you buy a home. And after, resist that nagging temptation to use easy credit to remodel or furnish your new digs. The quickest way to sour on home ownership is to stack a bloated credit card bill on top of new expenses like mortgage payments, homeowners insurance, property taxes, and maintenance costs.
4. Build an Emergency Fund. A well-funded emergency account not only protects you from financial and employment hiccups — it protects your assets. Having six to eight months’ worth of income squirreled away and available for withdrawal penalty-free is a must before you commit to buying your first home.
5. Fund Your Retirement. Don’t let the home buying process distract you from solid retirement planning.
First-time homebuyers, taking the financial leap can be daunting. But there’s real power in understanding your financial realities personally, beyond what the mortgage lenders tell us (and sell us). Empowered by knowing your financial picture, allows for better choices. Really “own” the homeownership process.