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.
1. Buying a Second House Has More Than Twice the Costs As a first-time homebuyer, you rarely see any money coming out of your pocket towards the actual costs of buying a home (aside from mortgage costs). When you’re a first-time homebuyer, you bring a large check for your down payment, but other than those for the mortgage, there aren’t a lot of costs. But, when you are selling your first home and buying your second home, you really see how the fees of house purchasing stack up. Plus you have all of the costs associated with the mortgage on your second home.
2. You May Not Have to Come Up With Cash I clearly remember how nervous I was about carrying my cashier’s check to the closing of my first house. But, if everything works out financially, your second house down payment should come from the proceeds of your first house. Your years of paying your mortgage or otherwise spending money to improve your house should enable you to have a down payment for your second house.
3. Finding a Second House Is Harder Than Finding a First House The criteria for my second house, however, was exhaustive. After several years of homeownership I knew what projects I was willing to take on to improve a house, what features are costly to install, and what qualities were absolute musts. With such an extensive list, I was far pickier about the houses I looked at. It required a lot more work and took a lot more time to find our second house than it did the first. (However, because I knew exactly what I wanted, I looked at far fewer houses than the first time around.
4. You’ll Remember a Lot About the Home Buying Process… Buying a second home is, in a way, easier than buying your first home because you’ve already been through the process once. Every step, financing, counter-offers, inspections, escrow were brand new and required a lot of mental energy. When the second time came around, I already had at least a basic understanding of what to do next. This made the process less stressful and gave me more time to focus on other things.
5. …But You Won’t Remember Everything As much as I did remember about buying a home. There are a lot of details that require re-learning (and a fair number of things can change in the real estate and mortgage world in just a few years). So, the realtor you use for your second house is just as important as your realtor was in buying your first home, because you’ll still need to be walked through the details of the home buying process. It’s critical that you can ask him/her any questions and that there is an open line of communication.