Deciding to buy a home is a huge financial step in your life. The excitement and anticipation of ownership inevitably brings with it trepidation, and in some cases, outright fear. After all, it’s not a decision that should be taken lightly. The good news is that you can control your homebuying experience by doing your homework. Here’s where to start.
1. How much house can you afford?
The first step for gauging your financial capability to buy a home is determining your budget. If you’ve already done some research, you’ve likely come across monthly expense or budget calculators. These tools are a good starting point for potential homebuyers to determine how much home they can afford. However, not all of these calculators comprise all of the monthly expenses you might encounter. You can use these calculators to begin assembling a list of your monthly expenses, and then add to it.
For example, you’ll need to incorporate monthly estimates for:
- Loans (auto, personal loan, line of credit, credit cards, etc.)
- Entertainment/dining out
- Savings and retirement plan contributions
Look closely at your financial institution statements and credit card statements from the past year for other regular expenses you may have missed.
Don’t forget to add in expenses associated with homeownership, such as:
- Homeowners association fees
- Homeowner insurance
- Title Insurance
- Property taxes
- Property maintenance
- Potentially higher utility costs
2. What should your mortgage payment be?
Once you have an idea of what money you’ll have available monthly after expenses, you can use SAC Federal Credit Union’s Mortgage Payment Calculator to determine the size of loan that you can afford.
The mortgage calculator will help you determine how much your monthly payments might be for different loan amounts. One rule of thumb, from personal finance expert Dave Ramsey, is that your monthly mortgage payment should be no more than 25% of your take-home pay each month. Consider your budget calculations and your personal comfort level when deciding just how much you want to spend.
Stick to your budget!
Once you’ve set your budget for your house, it’s important not to stray. SAC Federal Credit Union’s Alan Stoltenberg offers the following advice:
- Share your financial goals and financial comfort level with your loan professional. Be cautious of simply seeking the highest monthly payment you can qualify for. Often the payment your lender will approve is not the payment you realistically desire going forward.
- Ask your mortgage professional to provide you with a prequalification letter for the price range of home you are comfortable purchasing, not necessarily the highest dollar amount the lender is willing to approve.
- Stick to your plan to alleviate pressures to buy above your means. Ask your Realtor to only show you properties within your budget.
3. How much have you been preapproved for?
Getting preapproval on a home loan is an important step – one you should take before you go house hunting. A preapproval will tell you how much your credit union will lend you, and can give you negotiating power with sellers, who will look at you as a serious buyer. When deciding which financial institution to work with for your preapproval, Alan Stoltenberg, vice president of mortgage and business services at SAC Federal Credit Union, advises, “Be cautious with the temptation to simply rate or program shop, but interview lenders to find someone that you can trust. Seek a lender willing to take the time to bring you to an understanding and comfort level with the entire process.”
The size of your preapproval is based on several factors, including your income, debt, and credit score. Therefore, make sure your credit is in order before applying for a loan. You can do this by ordering a free credit report and disputing any errors you find. Get more information about improving your credit score here.
4. What type of house do you want?
Some people dream of a massive home with an immaculately manicured lawn (and perhaps a moat for the big dreamers), but that might not necessarily be the right fit for your needs. If you’re currently renting and need only a small space upgrade, a condo or townhouse could be a better choice. Taking some time to think about what you want in a house is an important part of setting your budget.
With all of this homework in hand, you’ll have an easier time walking through the next steps in the homebuying process, which include obtaining a real estate agent and looking for the home of your dreams—moat potentially included.
Are you thinking about buying a house? What questions or insights do you have from your experiences?
SAC Federal Credit Union offers VA loans, conventional loans and lot loans with financing options such as fixed and adjustable rates, purchases and refinances, and primary residence and investment with 10-, 15-, 20- or 30-year terms available. For more information, please contact Member Services at firstname.lastname@example.org. Or, you can apply for SAC Federal Credit Union home mortgage here.