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Margarita Spivak

Are You Ready To Buy Your First Home?

Margarita Spivak

February 26th, 2018 | Written by

buy your first home

You’re probably reading this because you’re considering making a huge financial step – buying your first home.  After all, it is the great American dream; a beautiful home, two rambunctious yet adorable kids, a white picket fence and maybe even a dog. While setting goals and having dreams is all well and good, it’s important to do your research before you buy your first home.

The typical first-time home buyer is 32 years old with a median income of $72,000. Fifty-eight percent of first-time home buyers are married, and 60 percent have no children. In the U.S., the median home price for first-time home buyers is $182,500 and the median down payment is 6%. [1]

Homeownership is not right for everyone. Owning a home comes with great responsibility and high costs. Before making the big step to buy a home, ask yourself these questions to evaluate if you are ready to buy your first home:

Are your finances in order?

Review your credit score and your debts. Lenders will look at your credit score to determine you credit-worthiness. They will use your credit score to decide how much they’re willing to lend you and how much interest you will be charged. FICO scores, powered by Experian, are a leading score used by lenders. Scores range from 300 to 850. Knowing your credit score is a vital step in accessing you credit worthiness. If your score is low, you may need to come up with a plan to bring your score up before buying a home. [2]

Review your debts. This includes credit cards, student loans, car loans, personal loans etc. This is not to say that if you have any debt, you will be unable to buy a house. Credit card debt, in particular, is a leading indicator of bad money management. This should be tackled before purchasing a home.

Have you saved enough money?

Although the median down payment on a home for first-time home buyers is six percent, it does not mean that you should aim for six percent. Ideally, you want to have at least 20 percent for your down payment so you can avoid Private Mortgage Insurance (PMI). PMI protects the lender from losing money if the borrower is unable to pay his or her mortgage. PMI can vary between 0.3 to 1.5 percent of the original loan amount, depending on the buyer’s credit score and the down payment size.[3]

Aside from the down payment, home buyers are also faced with closing costs. Closing costs are fees associated with the purchased of a home. Typically, closing costs range between 2 to 5 percent of the purchase price of the home.

Let’s say you buy a home for $200,000. If you put 20 percent down plus two to five percent in closing costs, you’re looking at $44,000 – $50,000 in cash up front. This does not include moving costs or furnishings for your new home.

Can you really afford that payment?

You may be approved for a loan that is more than you’re truly able to afford. Your monthly mortgage payment is more than just principal and interest of your loan. As we mentioned before, if you put less than 20% down on your home, you could be subject to PMI. You will also face property taxes, homeowner’s insurance, and possibly Home Owners Association (HOA) fees.

Are you ready for unforeseen costs?

One of the biggest differences between renting and owning is that you can’t call your landlord or the apartment maintenance office to fix a leak in your tub or a broken dishwasher. As a homeowner, if your dishwasher breaks, you must buy yourself a new one. Apart from your mortgage payment, you should be putting away enough money to afford any surprises home ownership throws your way.

Buying a home is an exciting step in your life. Being prepared is vital to insure your decision is financially sound and appropriate for your unique situation.

 

[1] https://www.nytimes.com/2017/04/21/realestate/first-time-home-buyers-statistics.html 

[2] https://www.experian.com/blogs/ask-experian/infographic-what-are-the-different-scoring-ranges/

[3] https://www.bankrate.com/finance/mortgages/the-basics-of-private-mortgage-insurance-pmi.aspx

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