Buying a home represents the single largest expense most people will ever incur. And now, with housing prices easily exceeding triple figures, the expense is higher than ever. Are you looking to buy your first home? If so, are you financially prepared? Many first-time buyers are not.
CityHome Collective is a real estate brokerage and interior design firm based in Salt Lake City, Utah. They have the pleasure of working in one of the hottest real estate markets in the country. Not only that, but they also work with a lot of first-time buyers coming to Utah from other states.
The agents at CityHome Collective could tell you some stories about ill prepared clients. That notwithstanding, they offer the following four financial principles to first-time buyers:
1. Good Credit Is Everything
One of the first things mortgage lenders look at is an applicant’s credit score and history. Those two things tell lenders the majority of what they need to know when considering an application. What does this say to first-time buyers? It says that good credit is everything.
Extremely poor credit can make it impossible to get a mortgage. And if someone with bad credit still manages to get an offer, chances are it will come with a high interest rate and less acceptable terms. The worse your credit history and score, the more risk you represent to mortgage lenders. Any willing to lend to you will charge you more for the privilege while making the terms less appealing.
2. Down Payments Are Required
Back in the 1990s and early 2000s, mortgage lenders were landing to anyone who could sign a loan agreement. They were not worried so much about credit scores and down payments. We’ve already talked about the former, so let’s discuss the latter. Down payments are required these days.
The general rule is to put down 20% of the sale price. That and good credit will secure the best possible deal. If your down payment is less, your mortgage options will be limited. Do not expect approval if you have no money to put down.
3. Interest Affects Total Cost
Next, you’re going to pay interest on your mortgage. Note that the rate will affect the total cost of your home when all is said and done. Just one percentage point could mean a difference of tens of thousands of dollars. Likewise, borrowing a larger amount will end up costing you more in the long run.
The point here is to do your best to borrow as little as possible and secure the lowest interest rate you can get. Depending on the eventual price of the home you buy, you could save more than $100,000 just by putting down a significant down payment and obtaining a low interest loan.
4. Don’t Blow the Budget
You would be smart to set yourself a budget before you start shopping for a home. That budget should be based on what you can afford in monthly payments combined with what you’re willing to pay for the type of house you want. Once established, make a commitment to not blow the budget.
It’s easy to go house shopping and fall in love with a property outside your budget. It is easy to convince yourself to spend a little more to get what you want. But exceeding your budget is asking for trouble. Just one unforeseen financial difficulty could end with you losing your home.
Buying a home will probably be the single biggest financial investment you ever make. Be careful. Get good advice, take your time, and implement sound financial principles for your own protection.