Financial Planning For Your First House

A young married couple buying their first house must squeeze the emotion out of the decision and do the math.

You don’t want to get in over your head and lose your investment, destroying your credit rating and crushing your dreams of leaving behind apartments furnished with garage sale stuff.

“A couple dreaming about a house should immediately start saving for the down payment,” says Mark Stempel, a certified financial planner and principal at Mark Stempel & Associates in Tucson, Arizona.

“I tell couples they should save 10% of their gross income. They shouldn’t take on new debt and should pay down existing debt to establish good credit.”

Here are five things you need to know when buying your first house:

• There may be a significant gap between what the bank says you’re qualified to buy and the house you can afford to own. When in doubt, be conservative.
  
  
• Don’t overlook the cost of home ownership when calculating what you can afford.
  
  
• Make an honest calculation of your other living expenses to avoid a steady diet of hot dogs and beans in your castle.
  
  
• Be prepared to buy a fixer-upper and plan to stay in it for at least three years because you can’t count on a quick sale at a hefty profit in the current market.
  
  
• Get your finances in order long before you start looking for a house and know your credit score.

When calculating the cost of buying a house, don’t overlook what’s frequently called PITI, or principle, interest (on the mortgage), taxes and insurance. For starters, the bank will require you to insure its stake in the property, generally the purchase price less the down payment. The smart homeowner insures the entire cost of the house. In addition, you’ll also want to buy fire, theft and liability insurance. Your property taxes will help pay for local schools, city streets, parks, police and fire protection. You can check the tax rate online or at city hall. Read Mortgage Primer: What First-Time Buyers Need To Know for more information. 

Home Repairs

Unless you buy a starter tract house, your first property is likely to be a fixer-upper. If so, budget for needed repairs and upgrades. Plan to spend about 15% to 20% of the purchase price to bring the house up to neighborhood standards. You won’t need the money up front because the work can be spread over several years. But set aside some money for emergency repairs. Any troubles with the roof, plumbing or furnace come out of your pocket – consider repairs one of the joys of home ownership. If you don’t have fix-it skills, think about acquiring them before you buy or be sure to budget for routine repairs.

If you buy a condo, budget for homeowner’s fees to cover the cost of landscape, maintenance and amenities such as a pool or tennis courts. If you buy a co-op apartment, you’ll be hit with a monthly maintenance fee plus a monthly installment on property taxes in addition to the mortgage.

Warning: Your house may decline in value. Prices in many regions of the nation are soft and don’t ignore the possibility that prices could get weaker before rebounding.

Do Your Homework

Before you start looking for a house, talk to a bank and secure pre-approval for a loan. This will give you:

• A maximum monthly payment, placing an upper limit on the house you can afford.
  
• A maximum loan amount.
  
• The minimum down payment required to close the deal.

Don’t confuse pre-approval with pre-qualification. The latter is of little or no value because it’s only a lender’s opinion that you would qualify for a mortgage at a specific amount – not a guarantee that you’d get the money. Smart sellers know the difference and give little weight to a pre-qualification letter when assessing potential buyers.

Check your credit report before seeking a loan and correct any errors. This can be done online and the three major credit agencies – Equifax, Trans Union and Experian – offer one free report per year. Be prepared to pay for your credit score. Consumers are typically scored on a scale of 375 to 850. In general, a score of 650 and above is a solid rating and you shouldn’t have any trouble lining up a mortgage.

If you score between 620 and 650, expect the bank to ask for additional information on your finances. A score below 620 is likely to mean you’ll be offered a smaller loan at a higher interest rate and you may be required to make a larger than average down payment. See What is a FICO Score And How Does It Affect You? and How To Read A Credit Report.

If your first house is several years away, start planning – and saving – now and you’ll increase your chances of achieving your dream.