Guide for first time home buyers

Budgeting tips to know before looking into buying a home.

What can you afford?

One of the biggest mistakes prospective buyers make is not understanding or realizing how to budget for a new home. Not only the closing costs associated with the purchase but also understanding the monthly payments involved. If you are looking for purchase your first home with a no down payment/100% financing mortgage loan, read our article for 100% financing for first time home buyers.

Mortgage loans for first time buyers

The loan or loans you obtain for your home purchase usually only cover the purchase price. Closing costs are over and above the loan amounts obtained. There are ways to finance closing costs which are covered in another article. See our article on closing costs for a breakdown of the fees associated with a real estate transaction.

First time buyers: do not forget closing costs

Depending on the size of your loan(s) the closing costs could increase. It helps to discuss these fees up front with your lender or broker so there is no surprise at the closing table. The lender is required to supply a Good Faith Estimate (GFE) which is a estimate of all the fees associated with your loan. As the buyer you will be required to pay these fees at closing. Therefore you need to budget correctly and have the money available at closing. Typical settlement fees for a closing can range from $3,000 to $8,000.

Monthly payments of your first mortgage

After discussing the costs it helps to discuss monthly payments. Many prospective buyers will only use a mortgage calculator to figure out the principal and interest payments and not include the tax and insurance (or condo fee). If you are buying a condo you will not need homeowner's insurance but you will be required to pay a monthly condo fee. The tax information is available from the realtor. Be sure you take those figures into account when budgeting.

A good rule of thumb to use when budgeting is to take 45% of your gross monthly income. After you have that figure back out all your monthly debts that will show up on your credit report (i.e. credit card minimum payments, student loan payments, car loan, personal loans or retail store accounts). Do not include utilities like cable, cell phone, these items do not show up on your credit and can be canceled easily. Once you subtract your monthly obligations from 45% of your gross income you are left with your 'housing expense' alotment. So for instance if you grossed $5,000 per month, 45% of that is $2,250. Then assuming you have $750 in monthly debts you would have $1,500 left for your housing payment of principal, interest, tax and insurance (PITI). Using a mortgage calculator you should be able to determine what loan amounts work with your situation.

Consult with mortgage professionals

These calculations and recommendations are just based on averages of many lenders. If you are serious about being pre-qualified please contact one of our trusted online mortgage lenders and they will take you through the process step by step. They will assist you in determining not only the right size loan amount but also the right loan program.

If you have been already pre-approved, you can fill out a loan application today and receive free mortgage loan quotes from multiple lenders in minutes.

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