Buying your first home.
First-time home buyers need to consider three factors when financing the purchase of their first home: down payment, credit and income. It’s important to understand each of these aspects so that you can prepare to qualify for your first home purchase. We are going to cover these and other topics and more to more fully prepare you for home ownership. Let’s start with the 8 Steps to Buying your First Home.
Step 1: DECIDE TO BUY
Do you really want to pay someone else’s mortgage?
If you’re renting and have a stable job with some savings, and a credit score in the high 600 range, you can likely qualify for FHA or conventional financing at historically low rates. The key question you need to consider is, of course, why are you still renting? Think
about it for a moment. If your reason is fear, then it may be time to let go of that fear and focus on the facts of home ownership.
Here is one example.
FEAR: I Can’t afford to buy my dream home.
The best way to get closer to buying your dream home is buying your first home.
Very few people can afford to buy their dream home when they buy their first home. In fact, according to the National Association of Realtors®, 69 percent of first-time home buyers in the United States compromised on some features of their first home. So you make some
compromises, buy your first home, and start building equity. This approach takes you further and faster down the road to being able to own your dream home than if you hadn’t purchased a home at all.
Kim and Craig serve as a great example of how this works. They used their first home as a forced savings plan for their future dream home. They even made additional principal payments when they could to accelerate their equity buildup. Interestingly, this approach allowed them to pay off their first home in about eight years. Then, all that financial equity was available to help them build a
second home—their dream home.
Purchasing your own home is a great investment that provides specific financial advantages, including equity buildup, value appreciation potential, and tax benefits. It’s also a forced savings plan that you cannot get from renting!
So, again, ask yourself if you can really afford to keep renting. Here is an example scenario.
Sheila bought a home for $450,000 with $15,000 down payment. Sheila’s $2,510 mortgage includes $1,367 of interest. Her total house payments are $30,123 annually. At the end of the year, $10,000 is tax deductible in the United States. She is in the 28 percent tax bracket, so her tax savings are $2,800 ($10,000 X .28). Her actual housing costs for the year are $27,323 ($30,123 – $2,800). And Sheila has built $7,930 in equity from paying down her loan Principal Payments. Her house also went up in value 4% ($450,000 x 4% is $18,000. At the end of the first year she has a total of $25,930 in equity in her home.
Sheila’s friend Chris believes he “can’t afford” to buy. He pays $2,200 in rent each month. Chris’s housing costs for the year are $22,800.
So, even though he thinks he’s saving money by renting, he actually falling behind Sheila in building wealth. At the end of the year he has nothing to show for all the rent he paid this year.
Let’s take this example even further. At the end of 5 years Sheila’s home has gone up in value 4% every year while she continues to pay down her mortgage. Chris continues to rent and that rent goes up 3% every year like clockwork. At the end of 5 years Sheila has $168,919 in equity. Her house is now worth $547,500 and she only owes $382,575 on her mortgage. Her payments are still $2,510 while Chris has seen his rent go up to $2,550 and he has wasted $142,500 in rent payments.
Above all else, when done
right, home ownership can
help lay the foundation for
a life of financial security
and personal choice.
There is never a wrong time to buy the right home. All you need to do in the short run is find a good buy and make sure you have the financial ability to hold it for the long run. The most important rule for keeping your stress to a minimum is that you don’t have to know everything—leave that to your real estate agent.