What to Know Before Buying Your First Home
Buying your first home can feel like an exciting, albeit overwhelming, experience from the start. It’s also one of the biggest decisions you can undertake. That’s why it’s important to make sure your finances are in check before you start picturing your dream home and all of its amenities. Luckily, Clearview has some helpful tips to help you prepare yourself.
The 28/36 rule states that a household should spend a maximum of 28% of its gross monthly income on total housing expenses (mortgage principal and interest, property taxes, and homeowners insurance). A household should also spend no more than 36% on total debt service, meaning house payments plus any student loans, car loans, or credit cards you may have.
These, however, are guidelines. You should also consider how much of your monthly cash flow you’re comfortable with spending on house payments. Think of what you can pay while still having money for all of the other necessities in life.
Start this process early! If you find errors in your report, you’ll need to correct them before you purchase a home, and that could take a while. If your credit history isn’t the best, expect to spend at least six months practicing flawless credit habits to build your score up.
Here’s an example from our Financial Resource CenterLink opens in a new window that shows how much of a difference good habits and a good score makes, if you qualify for a home: On a $150,000 30-year fixed-rate (3.85% annual percentage rate) mortgage, with an excellent score of 760 or higher, your monthly payment would be $703 and you’d pay $103,033 in total interest. But a credit score of 620 would cost $846 a month (5.4% APR) and rack up $154,407 in total interest payments.
You also have to consider the work that needs to be done on the house once you move in. Anything from paint to appliances need to be factored in to your early planning so that you aren’t bottoming out your emergency fund.
For more information on buying your first home, check out our mortgages and rates. And don’t forget to follow us on FacebookLink opens in a new window and TwitterLink opens in a new window for updates on events, promotions, and other useful tips!
Determine Just How Much House You Can Afford
Knowing what you can afford depends on your income, how much you’ve saved for a down payment, and your existing debt level. A good guideline to abide by when factoring all of these elements into what you can afford is the 28/36 rule.The 28/36 rule states that a household should spend a maximum of 28% of its gross monthly income on total housing expenses (mortgage principal and interest, property taxes, and homeowners insurance). A household should also spend no more than 36% on total debt service, meaning house payments plus any student loans, car loans, or credit cards you may have.
These, however, are guidelines. You should also consider how much of your monthly cash flow you’re comfortable with spending on house payments. Think of what you can pay while still having money for all of the other necessities in life.
Know Your Credit Report
You have the right to a free credit report from AnnualCreditReport.comLink opens in a new window. There, you can get one free report a year from all three of the reporting agencies. This step is crucial in the home-buying process because your credit score makes a huge difference in how much you qualify for and what you pay for the money.Start this process early! If you find errors in your report, you’ll need to correct them before you purchase a home, and that could take a while. If your credit history isn’t the best, expect to spend at least six months practicing flawless credit habits to build your score up.
Here’s an example from our Financial Resource CenterLink opens in a new window that shows how much of a difference good habits and a good score makes, if you qualify for a home: On a $150,000 30-year fixed-rate (3.85% annual percentage rate) mortgage, with an excellent score of 760 or higher, your monthly payment would be $703 and you’d pay $103,033 in total interest. But a credit score of 620 would cost $846 a month (5.4% APR) and rack up $154,407 in total interest payments.
Know How Much You Have Saved
You also have to consider how much cash you may need to make your home-buying dreams a reality. You’ll have to have money on hand for the down payment of a home – anywhere from 5% to 20%. In addition to the down payment, you should also be prepared for expenses you can’t roll into your mortgage, like closing costs, utility hook-ups, moving expenses, and prepayment of taxes, interest, and property insurance.You also have to consider the work that needs to be done on the house once you move in. Anything from paint to appliances need to be factored in to your early planning so that you aren’t bottoming out your emergency fund.
For more information on buying your first home, check out our mortgages and rates. And don’t forget to follow us on FacebookLink opens in a new window and TwitterLink opens in a new window for updates on events, promotions, and other useful tips!