Buying your first home is a big deal.
If you do it right, buying your first home may very well be one of the best investments you ever make.
However, if you fall into mortgage traps such as buying more home than you can afford, you will live with that mistake for a long time.
Buying your first home is not as difficult or risky as you may think if you enter the market as an informed buyer.
Renting Has Its Advantages
No doubt there are many advantages to living in an apartment while attending college or getting started in your career. For example, as a renter, you avoid unexpected financial responsibilities, and you are able to accept job opportunities that would require you to relocate.
Let’s break down some of the pros and cons associated with renting versus owning.
Not Your Property. Not Your Problem
When you are a renter, maintenance issues are not your problem.
HVAC goes kaput? Not your problem.
Plumbing issues? Not your problem.
A leaky roof or storm damage? Not. Your. Problem.
These costly burdens fall completely own the landlord.
Of course, it’s not your problemonlyif you have a landlord that is dedicated to keeping the property functioning at all times. If your toilet backs up a for a week or more, and your landlord is MIA, that quickly becomes your problem.
When you are a young professional, having the ability to move from place to place is a big plus. Depending on your company’s growth, it may not make financial sense to be tied to a particular area in your city, state or region.
Young professionals who are willing to relocate are very attractive to employers.
Most apartments that have been built within the last ten years have a lot of amenities that are very appealing to renters. Property features like gyms, outdoor kitchens, club houses, and swimming pools are available to renters at no additional cost.
As a homeowner, all of these luxuries would be extra costs in the form of memberships and fees. That could take quite a toll on a monthly budget.
Generally, when compared to owning a home, renting an apartment is less expensive for the following reasons:
- You don’t pay property taxes as a renter.
- Maintenance issues are not your responsibility.
- Apartments are not nearly as costly to heat and cool.
- Free amenities like gyms and swimming pools would be expenses on top of your mortgage payment.
- The down payment on an apartment is negligible compared to a home purchase.
- You cannot lose equity in an apartment.
Some of these savings are not as black and white as you may think.
Cost Benefits Can be Deceptive
Offhand, it is easy to buy into the notion that renting is less expensive than owning. But is that really the case?
Sure you don’t pay property taxes, maintenance costs or other ownership expenses directly. However, don’t fool yourself: you are paying the landlord’s mortgage — plus a little extra for his or her profit.
Any and all expected maintenance costs or financial responsibilities related to the upkeep of all of those “free” amenities you love so much are rolled into your monthly rent.
Additionally, many landlords are passing the costs of trash removal and pest control onto their tenants — as well as charging extra for parking.
At the end of your lease, you have spent all of that money for someone else’s benefit. You have nothing to show for it.
There is a finite amount of money you will earn in your lifetime. Spend it wisely.
Good Reasons for Buying Your First Home
There comes a time in everyone’s life to stand on your own two feet and begin to build a life.
If you like the city where you live, and you have noticed that home prices are rising, it might be time to purchase a home before you get priced out of the market.
Here are some excellent reasons to get into the housing market sooner rather than later.
- You are in a financial position to qualify for a prime-rate mortgage.
- Currently, you are paying more in rent than the estimated monthly mortgage. Have you taken the time to enter your data into a mortgage calculator?
- You have the time and energy to put into a fixer-upper.
- You have a down payment.
3 Frugal Factors to Consider Before Purchasing Your First Home
Let’s say you find yourself making good money at a stable company where you feel like sticking around for a while, and you have money saved for a down payment. Then, it is time to say goodbye to loud neighbors, unresponsive landlords, your roommate’s cat, and live the American dream.
Buying a home is a big deal, but it is doable. The best way to make this big decision is to arm yourself with knowledge.
Here are some great tips to keep in your back pocket when buying your first home.
1. Before Anything, Get Pre-Qualified for a Loan
No real estate agent or home seller will take you seriously if you are not pre-qualified for a mortgage. This is a must. It tells the agent and seller that you are serious about buying a home and have initiated the process of getting a mortgage.
You may be wondering what the difference between being pre-qualified and pre-approved means. Young professionals with decent credit scores will get many offers in the mail stating they are “pre-approved for a home loan” up to a certain amount.
“Pre-approved” means that a lender has independently determined that you are a good candidate for a loan based on public records. It’s just an offer. It doesn’t mean you have a loan in place. The loan amount is usually inflated to get your attention.
2. Take Advantage of Government Incentives for First Time Buyers
If you have average to excellent credit and have been working at the same job for a couple of years or more, then you are in a position to take advance of the perks of being a first time home buyer.
Don’t miss out on these great programs.
- Traditional FHA:The Federal Housing Administration (FHA) insures loans. This insurance allows potential lenders to comfortably offer first-time homebuyers, like yourself, much better interest rates. Another advantage is that the FHA allows a down payment of merely 3.5 percent. That’s a considerable discount from traditional down payments that range anywhere from 10 to 20 percent. Finally, FHA backed loans are much more lenient with credit scores.
- Fannie Mae Home Ready: Depending on your income, you could qualify for the Home Ready Loan Program. This program is an attractive option to first time home buyers because it allows for down payments as little as 3 percent. Also, with the Home Ready Program, you avoid many of the costly, upfront mortgage insurance premiums required by FHA. Primarily, this is a program designed for a potential homebuyer with low to moderate incomes.
- VA Benefits: Are you a veteran or currently serving in the military? You must take the time to research home loans offered through the Department of Veteran Affairs. VA loans are deservingly impressive. Many VA loans do not require down payments or monthly private mortgage insurance (PMI).
3. The 25% Rule: What You Can Buy Versus What You Should Buy
It all comes down to this: what the bank offers you is not what you should spend. Repeat that. Rinse. And repeat that again and again.
You need to understand how and why people end up in a home which isn’t worth what they owe. It’s called being upside down on your mortgage.
It is a terrible financial circumstance that you can avoid.
Just because the bank is happy to offer you $300,000 for your first home does not mean you should ever consider spending that much money. To avoid making a financial decision that can end up being a costly albatross around your neck for many years to come, follow the 25% rule
Your mortgage (principal and interest), including whatever amount must go into escrow each month to cover property taxes, should not exceed 25% of your income. It is an easy rule to follow that could save your financial future.
Watch this YouTube clip of national talk show host Dave Ramsey explaining the 25% rule.
The American Dream
More and more millennials are reporting that owning a home is not a part of the American Dream. This is a tragic trend because owning a home is likely to be one of the best investments you could ever make.
It’s not just the tax savings and other financial benefits, being a responsible homeowner means investing in your community. Owning a home is supporting your local schools and helping your neighborhood grow positively.
If you do your research and stay disciplined, you will end up thrilled with your first home.