Misadventures In Real Estate: Dollars Are What You Need
So you’ve decided you want to buy a home. Now what? Well, there are a lot of things – figuring out what you want out of a home, finding a real estate agent and figuring out how much you can afford to spend. Not shockingly, the last item on this list is one of the least fun, so let’s get this out of the way.
House hunting is glorious fun, but it goes much smoother if you’re looking at things you can afford. So how do you figure that out? There are two things you need to consider – the down payment, and your monthly costs, which should include not only your mortgage payment, but homeowner’s insurance, utilities, taxes, and any condo or co-op fees you’ll have if that’s the sort of home you’re considering.
We’ll tackle the down payment first, since that requires a little more forethought. Conventionally, the down payment is 20% of the purchase price of the home. This number can be lower, but you’ll have to pay mortgage insurance. FHA loans, for instance, require only a 3.5% down payment, but there are both upfront and monthly insurance costs, as well as restrictions on what property you can buy.
For a young, single person, saving this kind of money can be sort of intimidating. I’ve been saving somewhat aggressively since I graduated college, and am lucky enough to have parents who were willing and able to help me out. If you’ve been saving, or have wealthy and generous relatives, great! If not, it’s never too early (or too late) to start. What worked for me was having a certain portion of each pay check directly deposited into a high-ish (low interest rates – great for mortgages, terrible for savings accounts) yield savings account, so I never even saw the money in my checking account before it went somewhere to grow into more money.
I’m not going to go into great detail about ways to save money, because there are plenty of suggestions on the internet already. My only piece of advice is this: have a savings account. Even if you’re not trying to buy a place, have a savings account. It takes like, ten minutes to open one online (pick a bank! any bank! as long as it’s FDIC insured! and maybe shop around for interest rates), and your money earns interest instead of just sitting in your checking account. It’s great.
So now let’s talk monthly payments. If you’re renting, you already make one of those. Is the number you’re paying now something you’re comfortable with? Would you prefer it be lower? Are you okay with it being higher if it’s going toward something you own? These are things to consider.
There are an infinite number of handy calculators on the internet that are can help tell you how much home you can afford, what your monthly payment should be, etc. These are incredibly helpful tools, but do factor in your own lifestyle. If you know you like to blow half your paycheck on designer clothes or lavish vacations, factor that in to what you want to pay every month in housing costs. And, of course, if home ownership is something you really want, figure out what parts of your lifestyle you might be willing to cut back on in order to afford it.
So you’ve done your homework, you know how much you have saved and how much you think you can afford to pay in a month. Great! Now it’s time to sanity check those numbers by seeking out a mortgage prequalfication. This is where you give a mortgage lender your basic financial picture (assets, debts, income) and they’ll give you a number you could potentially get a mortgage for. Note that a prequalification is not the same thing as a preapproval; the latter is more involved and we’ll cover it later. The pre-qual will give you some solid numbers to start considering your options, but it’s not set in stone. This is because your financial information won’t be vetted, which is great if you’re not ready to go hunting for all your old tax forms and every other piece of financial paperwork you’ve ever had (which you’ll need when you’re getting your actual mortgage). It’s convenient, but it’s also subject to change once you give your lender your entire financial history.
Since the prequalification isn’t a commitment for anyone, the lender you get it from doesn’t have to be where you end up getting a mortgage from, so you don’t need to spend too much time agonizing over where to get one. The easiest place to start is probably your bank’s website, head over to their mortgage section and there should be information on how to get pre-qualified. If you don’t particularly love who you’re banking with, find a friend who does and use their bank. You’ll fill out some information online, an agent will get back to you with any questions they have, and then with a prequalification amount.
Now that you know how much you can spend, next week we’ll cover figuring out exactly what you want in a home so you can get the best bang for your buck! As always, if you have questions, leave them in the comments, or feel free to email [email protected]
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