5 Best Financial Tips for Buying Your First Home

Buying your first home is a huge step and a very exciting time.

For most people, their home is the largest item they will ever purchase. Because it’s such a large investment, it’s a good idea to educate yourself.

No need to rush here, even if you think you’ve found the perfect house in the best neighborhood in a hot market. Don’t buy if you’re not ready. There’s always another house.

Whenever I rush into a decision, I make a mistake. You definitely don’t want to do that on a six-figure purchase.

Take your time, and learn as much as you can before you decide to buy so you can make the best decision possible.

Below are the 5 best tips to keep in mind when buying your first home to make sure it’s a blessing and doesn’t leave you house poor and regretting your decision.

Look at your overall financial picture

When thinking about buying your first home, consider your full financial picture.

How much are you making? How much have you saved? What are your other financial responsibilities?

All of these questions impact how much house you can afford and whether it would be better to wait until your financial situation has changed.

Be honest with yourself here. You don’t want to buy before you’re financially ready and end up in a bind.

If you have debt, I strongly encourage you to pay it down (or better yet, pay it off!) before you decide to buy.

One of the factors lenders look at is your debt-to-income ratio, which means the percentage of your income that’s going to debt payments. This ratio impacts the terms of your mortgage. You will generally receive more favorable terms if you have less debt.

Another reason to pay off your debt first is to free up money each month to give you some margin.

Owning a home entails more costs than most people realize. Having more wiggle room in your budget each month will decrease the impact of home ownership costs.

Related: How to Pay Off Debt Fast

Create a budget

Before you meet with your lender to get pre-approved for a mortgage, you should get an idea of how much you can afford to spend.

I say that you should have your own idea of how much you can afford before you meet with the lender because they lie.

Our lender pre-approved us for something like $800,000.

We were already almost $500,000 in debt from student loans before we decided to buy a house. How does that math make sense?

Don’t listen to what the lender tells you that you can afford. They will have every spare dollar going toward your house payment. You won’t have money to do anything else because all of it will be going to your mortgage. That’s the definition of being house poor.

Seriously, don’t do it.

I’d recommend your mortgage payment be no more than 1/4 of your take-home pay. At that level, you still have plenty of money left to tackle other financial goals or just live your life.

The traditional advice is 1/3 of your gross pay. That advice never made sense to me because you don’t see your gross pay. One-third of your gross pay is an even larger percentage of your take-home pay.

If you want to own your home without the stress of being stretched too thin with a payment that’s too large, aim for the payment to be 1/4 of your take-home pay or less.

A mortgage calculator (like the one at mortgagecalculator.org) can help you figure out how much you can afford to borrow.

Save a good down payment

You want to save as much as you can before you buy. Traditional advice is to save at least 20% of the purchase price of the home.

While this is sound advice, sometimes it’s worth it to buy before you have a 20% down payment.

*gasp* Can I say that as a money  blogger?

Well, I said it.

In places where the housing market is on fire, saving 20% can be like a moving target.

It will generally take longer to save 20% than to save a little less.

If you’re in a hot market, by the time you save your 20%, housing prices will have increased, so you’d need to save even more to get to 20% of the new, increased price of the type of house you had your eye on.

The reason people advise you put down 20% is to avoid having to pay for private mortgage insurance, commonly known as PMI.

If you put down less than 20%, you’ll have to pay PMI. So what?

People make PMI out to be the worst thing in the world, but it’s really not.

Mr. TMG and I ran the numbers and decided to go with a 10% down payment and pay the PMI. This added about $60 per month to our payment, which was not nearly as much as we expected considering the way people talk about it.

We preferred to pay $60 more each month than to put another $20k down.

That being said, I wouldn’t recommend you put down less than 10%.

For starters, your down payment is another factor lenders look at, and they’re more likely to give you a lower interest rate when you have a larger down payment.

Another thing is that you don’t want to have so little equity in your home. A higher mortgage balance equals a higher monthly payment and lower security in your ownership of the property.

Related: The Number One Mortgage Myth You Don’t Want to Fall For

Run the numbers and figure out what works best for your situation.

Also, be aware that lenders typically want to see a certain amount of cash available at the time of closing. That means you can’t go in with just enough money to cover your down payment. You’ll need to have a little cushion, as well (usually about 2 to 6 months’ worth of payments).

Don’t forget the extra costs

Buying a home entails more than just the mortgage, both during the transaction and once you get into the house.

Before you buy a home, you’ll want to get it inspected. This typically runs between $300 and $500.

Additionally, you’ll have closing costs associated with the purchase, including attorney fees, taxes, title fees, and more. Closing costs usually run between about 2% and 5% of the purchase price of the home.

Once you sign on the dotted line and get the keys, you’ll also have a few extra costs that renters don’t have to worry about.

Did your stove stop working? It’s all you now.

What about those weeds in the yard? Yup, your responsibility, too.

Omgosh look at those bugs! Better call the exterminator.

One of the biggest mistakes first-time homeowners make is simply comparing rent to mortgage payment without regard to these other costs.

On top of your down payment, be sure to have extra set aside for costs like maintenance, lawn care, HOA fees, pest control, insurance, taxes, etc. You don’t want to be unprepared when one of those costs pops up.

Related: Everything You Need to Know About Emergency Funds

Consider a different location

Location is one of the biggest determinants in the price of a home, both in terms of the city in which the home is located and different areas within a particular city.

You can often get a great deal if you’re willing to look somewhere else.

For example, our same house just 10 to 15 minutes north of where we live would easily be double or triple the price because the neighborhoods in that area are super popular and trendy right now.

Related: Don’t Ruin Your Tomorrow Trying to Impress Others Today

Moving a little further out allowed us to get what we want without breaking the bank.

Had we been willing to move even further out into one of the suburbs of our city, we could have knocked another $50,000 off the purchase price.

Look into whether there are other locations that you’d be comfortable living in that have homes available at lower prices. You may be surprised what you find.

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Buying your first home can be overwhelming, but it doesn’t have to be. With these tips, you’ve got a head start on your financial path to home ownership.

Happy house hunting!

Have you bought a house recently? What other tips would you add to this list?