#AskTheDanielMtz Ep. 40: Financial Tips to Buying (Part 2)
We’re breaking down the best ways to prepare yourself financially before buying your first home. In our last episode, we explained the first step: eliminating any debt you can. The second part the process is determining your budget. Assessing your financial standing helps you determine the price range of the homes you can look at as prospects. There are a few things to keep in mind when running the numbers. AsktheDanielMtz is here to talk you through the process and guide you as best as we can.
How can I prepare myself financially before buying a home?
First, get an idea of the mark you want to reach. For example, there may be a specific area that you’re looking to move into. When looking at that area, you notice that the average price of the homes for sale hovers around $200,000. Of course, since most of us regular Joe’s can’t afford to buy a whole house outright, this is where our budgeting process begins. Talk to your lender to nail down how much you can borrow towards your first home. Then look at your own finances to see how much you can apply towards a down payment of that home. Your downpayment amount will depend on what kind of loan you get: conventional or FHA. Conventional loans usually require a bigger downpayment. If you’re in good financial standing you may be able to qualify for a 3.5% downpayment, but the average amount is 5%. For a $200,000 home, that 5% downpayment would be $10,000. FHA loan downpayments are 3.5%, which translates to $7,000 for our example. Is this feasible for you? If it is, great! Now move on to the monthly expenses.
Some sources cite that the magic number for new home owners is 28%. After all is said and done, your new mortgage, the taxes, and home owners insurance should not be more than 28% of your gross annual income. Because, you know, balance! Buying your first home can be an overwhelming process as it is, stretching your budget too thin may take away from the rest of your obligations. Start assessing the monthly debts you’ll be paying. Have a clear understanding of the amount you bring home after taxes before you start running these numbers. Take into account the bills you already have that you will carry into the new home: Netflix, your cell phone bill, how much you regularly spend on food — things like that. Then add on the new bills you’ll be signing up for: a full internet and TV package maybe, electricity, a new security system, perhaps? It all depends on your needs. Lastly: what won’t you be paying for anymore? Renters insurance and monthly parking are a couple of examples. When you have all the numbers in front of you, can you still afford to live comfortably? If not, you may have to adjust your price range for the home you’re looking to buy.
Lastly, factor in the all of the costs of buying the home. Closing costs are apart from the downpayment you put down for the new property. Usually these amount to about 5% of the sales price. It may be less, but give yourself a cushion and have that extra amount ready to buy the home. Every situation is different, but it’s best to be prepared as possible. Again, if you have to adjust, do so. The important thing is that you don’t overwhelm yourself with an outrageous amount of expenses for your income. Aim high but be reasonable. There’s plenty of other houses in the neighborhood.
These are your questions, and those were my answers. If you’ve got any other for me that you’d like answered, reach out to me on any of my platforms.
Let’s do Real Estate with confidence!