First-Time Homebuyer Budgeting Basics
Now that the high-fiving is behind us, it's time to really focus because there is more to your first home purchase than simply finding that perfect home that "just speaks to you." Yep, it's time to talk about budgets.
Setting a realistic budget is where many first-time home buyers simply miss the mark by not having the experience and full understanding of what all actually goes into owning a home. Here are seven tips that will help you lay out a plan that will set you up for first-time home ownership success.
- Down Payment - While this is a no brainer for most first-time home buyers, knowing that 20 percent down is standard, most don't realize they might have other options. Depending on your credit or you eligibility to qualify for other mortgage products, such as a VA of FHA Loan, you might be able to greatly reduce, if not eliminate, this expense all together. Step one is to meet with our Realtor or mortgage professional and discuss what options you qualify for and then add that total as item number one in your expense budget.
- Private Mortgage Insurance (PMI) - Depending on your loan terms or down payment, PMI might be required. PMI is typically included as part of a monthly house payment, so depending on your loan terms, this is something you need to ensure you include in your home owner monthly expenses column.
- Homeowner's Insurance - Although this is a typically expected monthly or quarterly expense, the actual costs of insurance is often surprising to first-time homeowners. Depending on your chosen policy or coverage level, the price could potentially be much larger than expected. You'll want to make sure you have a frank discussion with your lender about exactly what level of coverage is required by the bank to secure and maintain your loan, and then decide from there how much more you want on top of that amount.
- Taxes and HOA Dues - When trying to determine what monthly payment you will be comfortable with, don't forget to included taxes and HOA dues in that calculation. Your property tax rates will vary depending on county, schools and emergency services available in your area. HOA (Home Owner Association) dues are not always a requirement, but many subdivisions, especially newer ones, will require them. Doing a little online research ahead of time will help you establish ballpark estimates for these fees and will give you a base number you can use in your initial monthly mortgage calculations to help you get a better picture of just how much house you can really afford.
- Maintenance Costs - This is an area where first-time home buyers often find themselves very unprepared. Even on newer construction homes, things will go wrong and as go the Laws of Murphy, they will typically happen all at once. For your budget, set aside 1-2 percent of your home's purchase price for the first year for these unforeseen expenses so that when they do pop up, you'll be ready to handle them like a boss!
- Closing Costs - You had your down payment ready to go, but did you realize that there are fees on the closing end of this transaction as well? While the fees that you'll run into may vary, according to requirements established by the Consumer Finance Protection Bureau (CFPB), you'll be receiving a detailed list of them well before closing so you can be prepared and won't go into sticker shock when that final payment breakdown is handed to you across the table during signing
- Home Ownership Monthly Expenses - Odds are you've rented an apartment before so you've got the basics of electric, cable and phone down; but when it comes to a home, there are a few additional items you'll want to allow for such as water, gas, and yard maintenance. Also, if your new home is larger than your old apartment, you should probably allocate funds each month to help you fill your home with a variety of necessities, like a washer and dryer, and home furnishings.
While the list of expenses might seem daunting, having a clear understanding of what to expect when buying a home and the monthly expenses that go into owning a home will actually set you up for budget success and allow you to enjoy your new life achievement of becoming a first-time homeowner in worry-free bliss.