When you are in the home buying process, there are several things you need to consider before you sign on the dotted line. Well, the solid black line I guess. We have had several friends ask us how much their mortgage payment should be. Well, consider this post a house buying guide. If you are looking for your first home, there will be some very useful tips to follow before buying your home.
When you are in the market to buy your first home, the bank wants to know how much total debt you have before buying your first property. They will then calculate how much you could spend on a house all the way up to 45% of your gross income. Your gross income is the amount of money you make before taxes are taken out. So this is not the money you are bringing home. They calculate it based upon money you aren’t even bringing home! Does anyone else see a problem with that?
I want you to be prepared before buying a home. So if you are close to buying your first home, this article will help you do it in a smart way. Trust me, you don’t want to end up with a gigantic mortgage payment and worry about how in the heck you are going to pay your mortgage.
There is no hard and fast rule of how much you should spend on your mortgage however, I definitely recommend that your debt-to-income ratio be less than the 45%. This all goes back to becoming debt free. You want options in life, right? If you want options to explore everything else you want to do in life, then please make sure that you aren’t strapped to a mortgage payment for 30 years.
House Buying Guide: 8 Tips for Buying a Home
Here are my top tips for deciding how much house you can afford:
15 Year Fixed Mortgage
You all know I love Dave Ramsey. He is the cheese to my cheesecake and he recommends a 15 year fixed rate mortgage and I don’t disagree with him. The mortgage per month will be higher but that is ok. You want to get the darn house paid down quicker anyways so get it right the first time and just go in to home ownership knowing that you can afford a 15 year fixed mortgage and better yet. Know that you are comfortable paying this mortgage and you don’t feel strapped. You don’t want to feel stress over money so don’t put yourself in a position where you will be stressed. Make the decision to pay much less interest by having a shorter term loan. Buying a home on a 30 year mortgage will cost potentially hundreds of thousands of dollars more depending on your interest rate. Just say no to a 30 year to begin with.
There is no secret that I love foreclosed properties. Most of our rentals have been foreclosed properties. Some have been bigger headaches than others, but all in all, we have had pretty good experiences with foreclosed homes. If you are handy, this is a no brainer. Buy a home at a lower price and do some work. Can you say instant equity? Yes! This is what you want if you are going to buy a home whether to live in personally or to buy as an investment. You want to move in knowing that you can make a few changes and add value to the house. Boom.
Related post: How to Finance Your First Investment Property
Have a Downpayment
I know that most of us want to pay nothing when we buy our first home, but I would advise against this. It is good to have some money down. It shows you can save for the house and it lowers your monthly payment. Any time you can cut your monthly bills in any way, I suggest you do.
Don’t do a Home Warranty
You will be asked if you want a home warranty. I don’t think you should do this. I think you should go into a house and see if there are any major things going on. The major things you need to assess before buying a home are: roof, hot water tank, plumbing, electrical, air conditioning unit, heat mechanism, foundation issues or anything structural. If there are foundation issues and you are a first time homebuyer, run as fast as you can. We still run away from those types of issues. They are kind of a big deal and it will cost a lot of money to repair. For the list I gave you above, understand how much each of these things will cost to repair in your area. Figure this in to your buying price and ask for a reduction when negotiating if there are any areas you are concerned about. If you buy a home warranty, you will be paying on that monthly and it is an extra expense you likely won’t need.
Invest in a Home Inspection
A home inspection will cost a couple hundred bucks, but it will be worth it when you find a house you like. The inspection will give insight on whether or not the house you are about to buy is worth it or not. The inspector will also give you an idea on whether or not there are any big issues. He/She may also give you an idea on how much it will cost for the repairs needed and you can negotiate that in your price.
Know the Neighborhood
This is another area I harp on when buying a property. Greg always says he wants the cheapest house in the best neighborhood and I believe him. He is absolutely right about that. When you are buying a home, check Zillow for the Zestimate on the home and what the home was last sold for. This gives you a lot of info about the property before you even set foot in the house. You will know what the taxes are, what the prior owner paid, what the house is worth and in which school system the house is located. All very helpful information, no? Why should you know the area? You can tell based on the school system whether or not the house is in a good area. Schools dictate where families will move because parent’s want good public schools for their kids to attend. If you know the neighborhood before you walk the house, you are already in the know.
Know Your Interest Rates
This one isn’t a total game changer before you find a house, but it is really nice to know how much the interest rates are so you can calculate how much your mortgage will be. You can go to Zillow, find a house, find out how much taxes are, divide that number by 12 (12 months) and you can then go to a mortgage calculator like this one and find out how much your mortgage will be before you even look at the house. This is especially helpful when sticking to a budget because there are no surprises on what your payments will be. You won’t have to go through the feeling of walking through a house that is too expensive and that you can’t afford if you know all the numbers ahead of time.
Find a Great Realtor
Talk to your friends and family who have bought homes recently. They will give you a referral for a good realtor. They will also steer you away from a realtor who is too pushy or just wants to make a sale. Either way, it can be a game changer with a good realtor. You want someone you can trust and who isn’t pushy. You may have to look at 10-20 homes before you make a decision and don’t let anyone pressure you into buying a home that isn’t right for you.
Related Post: How to Pay Off Your Home Mortgage Sooner
How Your Mortgage Fits Into Your Budget
Your mortgage will likely be the most expensive thing in your budget, but keep in mind that it isn’t the only thing in your budget. You need to make sure you are comfy with this mortgage as it will likely hang around for years. Ideally, you want to get that bad boy paid off as quick as possible just like everything else, but I suggest getting smaller debts out of the way sooner.
Pay your mortgage payment through online bill pay that way it is automated. Remember that anytime you can create a system, do it. Also, if you are in a position where you can pay a little more each month to your mortgage, more of your money goes toward the principle of the house paying down the actual mortgage sooner (your extra money does not go to the interest, it actually goes toward the mortgage).
Go into home ownership with your eyes wide open. I know you want the house of your dreams, but keep in mind that it isn’t fun to be stressed out about money. You can find a house that you love that fits in your budget. You may have to look around a bit longer, but you will find that gem:)
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