Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].
Question from Luke of Goldsboro, NC: Hi Brian, My wife and I have been married seven years and are in our early 30s. Many times, we’ve discussed buying our first home and have occasionally kept an eye on the local market. Right now, the prices of homes seems to have more than just leveled off. Local prices have actually been going down slightly for several months. We both work, have a two year old, and between us bring in about $60,000 before taxes each year. Our most basic question is: how do we know if we are ready to buy a home? We’re hoping to buy something for about $120,000.
Answer: Hello Luke. I get it. Taking the leap to first time homeownership is a daunting under taking. A lot of people your age are skittish about making the biggest financial decision of their lives. You provided a limited amount of information about your personal circumstances. Besides your family size, income, and target purchase price, you almost certainly need to take a deeper inventory of your personal situation and finances. For instance, do you have large college loans as many people your age do? Do you have an affordable car payment or are you making car payments on two upscale cars?
A good place to start your inventory is by considering if your income is reliable. Along with your credit score, steady employment is something lenders look at closely. Besides with your debts (college, cars, etc.), take a look at your financial assets. Ideally, your assets are worth more than your debts but at a minimum, you’ll need to be able to raise enough cash for a down payment. For a $120,000 home, the down payment will be roughly $4,200. You’re also going to have closing costs. A recent Zillow survey showed closing costs averaged roughly $3,700 for a $150,000 home. You may be able to wrap some of your closing costs into your mortgage but a good starting point is estimating it will cost slightly less than $7,900 to become the owner of a $120,000 home. Of course, the asset side of the equation immediately increases by the value of your down payment and you can expect your assets to continue increasing as your home appreciates in value.
There is no simple answer to exactly how much money you need. The lender’s formula has a complex set of variables including debt-to-income ratio, available credit and score, credit history, and the amount of available cash for the down payment and closing costs, as well a few other numbers. That’s a good reason to talk with a lender about getting prequalified. Be sure to talk a few different lenders. Even if you can’t prequalify right now, they can usually tell you what financial moves you can make to qualify the fastest.
But take your financial inventory and planning one-step further. When you own a home rather than rent, there are a few additional expenses that you have to account for. In today’s market, it’s quite possible that your new mortgage payment will be the same or less than your rent. Obviously, this depends on how much rent you pay and how much house you buy. Still, beyond the mortgage, you can expect your utility costs to increase; you’ll have property taxes and insurance, and potentially an HOA fee. Other new expenses can be yard maintenance and repairs to the house. A few of these will be included in your mortgage payment but you’re always better off doing the math so that you have a better understanding of your budget needs. Many young couples have dreams of buying new furniture for the living room, dining room, and bedrooms. You should probably be realistic that this won’t happen for a few years.
Buying a home forces you to learn a lot about your current finances. It should also make you think about your future finances. If you decide to buy the maximum house that you can afford, be prepared to forego a few vacations and maybe some of the extras that you’re accustomed to. As you plan your financial future, also think about maintaining an emergency fund. That can include many things such as an unexpected car repair to a medical emergency to becoming unemployed. If you want to take a lesson from older generations, although not all of them did this, many kept a minimum emergency fund equal to at least three mortgage payments.
Luke, one last thing that isn’t financial but can be important. Most first time buyers trade up to a larger home sooner rather than later. It can be a good idea to keep the ease of resale of your first home in mind as you begin looking in different neighborhoods.
Please comment with their thoughts and experiences about the first time homebuyer experience. Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].