June 18th, 2020
So you’re thinking about buying your first home? Maybe you’re young, feeling set in your career, and want a place to call your own. Perhaps you’re looking to start a family and want to lay down roots somewhere. Or maybe you want to invest in an income property and rent out a back-house or duplex.
Whatever your ‘why’, you’ve got the feeling and maybe you’ve been saving up for a down payment. But this is most likely the biggest financial decision of your life, so it’s important to plan ahead and ensure that you’re prepared for the journey! So when exactly is the right time to buy your first home?
People are doing life differently now. The order of operations of our trajectories has evolved and people aren’t necessarily getting married, having kids, and buying homes in any specific order. So there’s no magical age we should all strive to buy our first home. Rather, becoming a homeowner should be more about your unique path, financial preparedness, and future plans. Here are a few things to consider before taking the leap.
How Long Are You Planning to Stay? Are you relocating to a new city for a job? Just want a change? Or maybe you’ve had your sights set on a house in your neighborhood. Do you think you’ll still be with your current employer for the foreseeable future? Do you want to travel the world and not be tied down? Of course, reselling is always an option, but sometimes selling your home only a few years after buying it can mean a financial loss due to originate fees, mortgage interest, closing costs, so think about if you want to stay in your current city for a little while.
Will My Lifestyle Preferences Change? Are you planning on starting a family in the next five years? Think about where you’re at now and what your five-year plan is. Getting a starter home as a single person vs looking for a family-home are two very different homeowner profiles. Of course we can’t predict the future, but you might have a good idea of the kind of life you want to live and what you value in a home, neighborhood, etc.
Buying your first home could be at age 23 just as much as 53. Everyone’s journey is different. What really matters is how prepared you are.
Talk to a housing professional about your financial profile and lay everything out on the table. They’ll consider your income and overall debts to discover your DTI (debt-to-income ratio), credit history, and other assets that paint your financial picture. Your financial profile will be used to determine what sort of monthly mortgage payment you can afford and include other payment estimates like homeowner’s insurance, property taxes, and other costs.
Make sure to consider other costs that go along with owning a home as well, like maintenance and utilities. No landlord means you do it all yourself! Many industry professionals suggest allocating 1% of a home’s total value for annual maintenance expenses.
Are you able to put away money right now for savings, an emergency fund, or perhaps you already have a down payment savings fund? You don’t need to have a “9-5”, but even if you’re a freelancer or gig worker, as long as you have steady, predictable income, you’re a candidate for homeownership.
Saving for a Down Payment: There are many options out there for putting a down payment on a house. Contrary to popular belief, 20% is not the only option. There are programs that offer as little as 1-3%, this just means you’ll probably have a higher interest rate or be required to purchase PMI (private mortgage insurance) to protect the loan. Talk to a lender about different down payment options that will work best for you.
Check Your Credit: To get the most competitive mortgage interest rate, your financial profile needs to be in good shape - which means having a good credit score and report. A competitive mortgage rate could mean a saving of tens of thousands of dollars through interest and down payment savings. If your credit needs some work, it’s smart to start preparing about a year in advance of a home purchase. You can definitely do the work to raise your score and clean up your report!
To get your credit in top shape, avoid opening new accounts (this can lower your credit score), pay down your existing debts and balances, and try to improve your credit utilization. Credit utilization is the percentage of your limit that you’re actually using. You want to keep that low, between 1-10%.
So you’re feeling confident in why you want to buy a home, where you want to buy it, your 5-year plan, and your finances! Talk to a lender or ng professional throughout the process. There’s no shame in talking to someone before you’re ready - that will just help you become better prepared. And remember, your lender and Realtor are there to help you, so they can provide guidance and answer questions for you. Don’t rush into anything, but feeling financially prepared will reduce stress in the long run and ensure a successful first home purchase!