It's soooo exciting... Daydreaming about buying a home, looking on a variety of websites to find listings that look appealing in areas you want to live. The eager anticipation of finding a home that appears perfect; shortness of breath, butterflies in the belly, clicking on the pictures over and over again... Yep, you've been bitten by the home buying bug!
As a Realtor, I love sharing in the excitement of the hunt with my buyer clients. It's a wonderfully rich experience with every client. But particularly for first time buyers -- there will only be one first home, which makes it even more special.
Reality check! Though the adventure is upon you and you're beating the bushes for that perfect house, there's nothing more discouraging than setting your sights on a specific home, and then discovering that it's not within your price range. This can set buyers up for unrealistic expectations or disappointment. Personally, and professionally, I'd prefer to avoid both!
Although it's wonderful to dream (and costs nothing!) it's important to establish a realistic budget and meet with a lender, before you and your Realtor start setting appointments to see homes.
The simplest way to figure this out is to answer three questions:
1) What is your monthly income before taxes?
(You can count overtime, bonuses and commissions in this total, if you can show consistency over a year or two, alimony, child support, rental income after deducting expenses, and various benefits or interest income.)
2) What are your long-term debts that you pay monthly?
(Credit cards, vehicles, lines of credit, education, alimony, etc. or items you will be paying soon (if your college loans were deferred, be sure to include them in your budget planning.)
3) How much cash do you have toward your down payment and closing costs?
This can include gifts or down payment assistance programs, which usually require that you fulfill a first-time buyer class. You will need to show where the money came from (important: do NOT borrow money, even if it will not show up on your credit report, without discussing with your lender first.)
Experts agree that no more than 1/3 of gross income should be spent on housing. That is only part of the story, though. Long-term debts add up, and most loan approvals require that no more than 45% of gross income will go toward ALL reported debt. If you have a car payment and several credit cards, plus a student loan, this will lower the amount you can wisely spend on a home.
KEY POINT: If your debts or spending are out of control, you would serve yourself best by utilizing education to improve your money management skills. If your finances are out of control and you have less money than month, putting off buying a home until you are prepared for success is the best decision you can make. See our new blog Improving Your Money Management Skills
for four great links we recommend.
Once you have a handle on your finances and feel confident in moving forward, and you've gathered the information to the three questions above, you can prepare for meeting with your lender. Here's a quick checklist of items to bring to a meeting with your lender:Lender Checklist
We hope this information is inspiring and useful for you. Give us a shout if you have any questions or comments. We'd love to hear from you!