Budgeting Basics for First Time Home Buyers

So you or someone you know is thinking about buying their first home? What an exciting milestone you have reached! While I'm sure you've got big dreams and even bigger opinions about what you want in your home, the first step to buying your first home is to find out just how much you can afford.

First - Check out your Credit Score. Lenders will use several factors when determining which loan you qualify for. One of the most important factors - especially in today's tightening lending market - is your credit score. The interest rate you pay will be tied to your credit score - so having a better one means you will pay a lower interest rate. This can be done by your mortgage broker when you sit down with them and calculate how much you will be able to afford on your new home.

Secure your Pre-Approval Letter. After you've talked with a lender or mortgage broker, you can be locked in to an interest rate for 90-120 days, depending on the lender. Even if interest rates go up, as long as you make your purchase in that time frame you will be guaranteed the interest rate at the time of your pre-approval. If mortgage rates go down in that time, talk to your mortgage broker and you can get resecured at the lower rate. Getting pre-approved also helps your negotiations with a home seller, because they know you are serious about buying and have done your homework before tying up their home for several weeks for final approval on a mortgage.

Factor in your Finances. Now that you know how much you can afford, find out if it fits into your monthlly budget. Track your income and expenditures for six months and factor in your monthly payment, taxes, and insurance. Your home-related expenses should not exceed 32% of your gross household income (this is called Gross Debt Service, or GDS). Your lender will also look at your home-related expenses along with your other debts and obligations (loans, car payments, credit card payments, etc), and this total (your Total Debt Service, or TDS) can't be more than 40% of your gross income.

Understand the up-front and additional costs. Find out how muich you're going to need to put toward the down payment. Most lenders require at least 5% of the purchase price, although I have recently seen CHMC require at least 10% for condominium purchases and other lenders do have different varieties of 0% down mortgages (talk to your mortgage broker to find out which product is best for you). Be sure to factor in the cost of an inspection, lawyer fees, and other closing costs which could be another 2-3% or more of your purchase price.

Save, Save, Save. If you're not sure you can meet the down payment requirements, take a look at your budget and find areas where you can cut. Can you eat out less, cut coupons, and watch grocery store spending? Watch video-on-demand instead of going to the movies, or make it a game to see how inexpensive you can make date night. There are many resources available to first-time buyers looking to save money.

Every step you take to make sure you are in a financially stable condition before you purchase your first home will give you a solid foundation for success.  Our team is prepared to help you buy a home that fits your needs and your budget. Give us a call to learn about the great homes that we can show you today!