FINANCIAL WELLNESS

4 min read

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Aug 2022

Financial Planning Tips for First-Time Homebuyers

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WHAT YOU'LL LEARN

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The upfront costs of buying a home

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Effective ways to budget your money

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Why credit matters during the homebuying process

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WHAT YOU'LL LEARN

check icon

The upfront costs of buying a home

check icon

Effective ways to budget your money

check icon

Why credit matters during the homebuying process

There are a lot of moving parts to the homebuying process, so it’s understandable to be a bit wary before making the leap. After all, a house is likely the largest purchase you’ll ever make.

Just like anything else, preparing beforehand will make the process much easier. Creating an outline for how you’ll fund your first home before signing on the dotted line for a mortgage will set you up for success. But before we get into the tips for making your homebuying journey easier, let's take a closer look at the type of costs you’ll need to incorporate into your plan.

The Down Payment and Other Upfront Costs

After pre-approvals have been sent and underwriting is complete, it’s finally time to purchase your home. In other words, it’s time for you to make some upfront payments. These payments include the down payment, closing costs, and fees for your lender’s aid in financing the property.

The Down Payment

The down payment is a percentage of the purchase price you pay at closing. The rest will of course be made up with the mortgage payments throughout the rest of your loan’s term. For example, a 20% down payment on a home that costs $200,000 means you’ll be paying $40,000 upfront.

But 20% is not the universal benchmark many people believe. Some Conventional loans require as little as 3-5%. And for FHA loans, common among first-time buyers, the minimum is 3.5%.

To fund your down payment, you don’t need to rely entirely on your savings. You can apply for a down payment assistance programA special financing program that helps make homeownership a reality for homebuyers who otherwise may not have the funds for a down payment.down payment assistance programA special financing program that helps make homeownership a reality for homebuyers who otherwise may not have the funds for a down payment. (also known as “secondary financing” or “secondary mortgage”). Better yet, these funds can also be applied to the closing costs we discuss in the next section.

You can also use gift funds from a family member to help toward your down payment on many types of loans. Your Mortgage Banker can assist you with the guidelines and the documentation you and your relative must provide.

In addition to the down payment, there are a few other upfront costs you’ll be tasked with paying at closing.

Inspections, Appraisal, and Closing Costs

For any first-time homebuyer, knowing your upfront costs before applying is crucial. Though inspections aren’t required (except mandatory termite inspections for VA loans), it is helpful to know that your new home’s plumbing, electric, foundation, and other characteristics are sound. You're expected to pay out-of-pocket for these services. If applicable, you’ll also need the well or septic inspected and land surveyed by a professional.

You will also pay upfront for an appraiser to make sure the property is worth its asking price. And by the time closing rolls around, you’ll have to pay for closing costs, or settlement costs, which include, but aren’t limited to, title searches, property taxes, lender fees, and insurance.

You can speak with an Atlantic Bay Mortgage Banker to get a rough estimate of the cost of these upfront costs.

Now, with the upfront costs addressed, we can dive into our financial planning tips for first-time homebuyers.

Save Your Money

Even before browsing all the listed homes for sale in your area online, you should make sure your available finances are ready for the upfront costs and upcoming monthly mortgage payments. The more money you have put away, the more prepared you’ll be for keeping up your usual day-to-day living expenses in addition to bills and other costs.

Some easy ways to start saving now include mapping out your largest expenses to see where you can cut back and selling any unwanted items around your home.

Review Your Budget

In addition to keeping your savings ship-shape, you should budget your money now to ensure you can comfortably make your future monthly mortgage payments. Look at how much you spend each month on utilities, car payments, food, kids, student debt, retirement, saving deposits, and entertainment. Then, consider if adding a mortgage to that list is something you can afford at the moment.

A good way to get a clearer picture of your budget and whether it can accommodate a mortgage is to calculate your debt-to-income ratio (DTI)The percentage of your gross monthly income that is used to pay your monthly debt and determine your borrowing risk.debt-to-income ratio (DTI)The percentage of your gross monthly income that is used to pay your monthly debt and determine your borrowing risk.. Your DTI measures the amount of your money that goes towards paying debt each month. To calculate your DTI:

  • Add all your monthly bills, loans, and debts together

  • Exclude living expenses (groceries, utilities, gas, etc.)

  • Divide that number by your monthly income before taxes

When you apply for a loan, your lender will execute an official DTI calculation, but it doesn’t hurt to get a rough estimate of your percentage in the meantime. The number you come up with will give you an indication of how much of your remaining income and budget can be allocated to a mortgage.

Be Mindful of Your Credit

In most cases, you’ll need to meet a minimum credit score to receive a mortgage. To keep your credit in good standing, don’t apply for any more credit cards, pay off your balances on time, don’t make any large purchases before applying, and make sure your credit report is free of any mistakes. Errors on credit reports can be quite common, so keep your score healthy by watching out for:

  • Accounts reported late when you paid on time

  • Incorrect account numbers or accounts you don’t own

  • Inaccurate credit limits or loan balances

  • Addresses of places you never lived

Understanding your credit report can be tricky, but with a thriving credit score, you’ll be all set to move on with the big purchase.

Before applying for a loan, make sure homeownership aligns with your long-term financial and life goals. But with money saved, a good budget in place, and your credit in good standing, you’re ready to become a homeowner. Contact an Atlantic Bay Mortgage Banker today to get the process started!