Part 2 of your Quickstart to Homeownership

In our last post, we explored the basics of getting started in the process of homeownership. We’ve estimated how much your dream home will cost by using mortgage calculators such as Bankrate, and we’ve also taken some time to review your credit report and make any necessary changes. Based on the information you discovered, you might be rethinking your plans entirely. You might decide that you are completely comfortable with your estimated mortgage payment and look for a more attractive home with a larger price. Alternatively, your new perspective with an estimated monthly mortgage payment may convince you to stick with renting for another year or two.

If you’ve gotten this far, congratulations! You are well on your way! But before you go online or to your bank to fill out an application for a mortgage, take some time to talk to some of your friends and family about homeownership. Ask them about the process. Do they have recommendations for a realtor or mortgage loan officer?  Is there anything they would have done differently? Was there a step in the process that they felt unprepared for? Their experiences may not apply to your situation, but their information is nonetheless helpful in navigating your home purchase process.

I strongly recommend that you practice having a mortgage. I expect to take on a mortgage with a $1000 monthly payment, then “pay” your mortgage by tucking it away in your savings account. What impact does that have on the rest of your budget? Are you comfortable? Do you still have the ability to save, pay off existing debt, and spend money on things you enjoy? What do you have to give up in order to make that $1000 payment?

At this point, you are ready to obtain a pre-approved mortgage. A pre-approved mortgage is basically a promise from a lender that you qualify to borrow up to a certain amount of money at a specific interest rate. This promise is subject to a number of conditions but allows you to see how much the lender has evaluated that you can afford. Keep in mind the following:

Each application can cause a small drop in your credit score, so apply with moderation. Use referrals from your friends and family. Did they have particularly good or bad experiences with a particular lender?

Remember, lenders are in the business to issue loans and make money on the interest. Your pre-approval is for the maximum amount you could potentially borrow. This does NOT mean this is what you can afford. You don’t want to become “house poor,” where you have an amazing home, but not enough income for anything else!

Many individuals ask, “How much home can I afford?” Like we said earlier, “it depends,” but a general rule is roughly 25%-33% of your gross income. Make sure you are including the cost of your homeowner’s insurance, real estate taxes, and HOA fees in addition to your mortgage repayment cost. It is also a good idea to factor in an annual housing maintenance budget into that percentage, generally 1-3% of the purchase price. So a $150,000 home would have an annual maintenance cost of $1500, or $125 a month.

Stay tuned for our next post on “Homeownership: Shopping and Sealing the Deal!”