There are a variety of questions and factors to consider before buying your first home.

How Long Will I Live in the Area?

This is purely a financial move. Real estate agent/broker fees are up to 6% of the purchase price. 6% of $200k is $12,000. In order to be strategic in this is to only buy if you plan on being in the area for a minimum of five years and more like ten. This will combat the pricey fees that are associated with selling real estate.

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Front End Ratio: Principal, Interest, Taxes and Insurance (“Piti”)

Let’s use $50k yearly salary for an example. Most lenders will only let your PITI be 30% of your gross income. Example below:

Plugins:

Yearly salary – $50,000

PITI accepted by most lenders – 30%

$50,000 / 12 months = $4166 monthly gross income

30% of $4166 = $1250

So, you will be able to afford a $1250 monthly mortgage.

There are lenders who will push the PITI up to 40% of your gross salary. I say be careful with this as it is riskier. If you were to have an unplanned income loss or some other life event that now changes everything. If you forecast that you will not have any life-altering events happening in the future a 40% PITI is bearable.

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Back End Ratio: “Debt to Income Ratio”

This is another ratio used to see how much mortgage you can afford. Most lenders want to see your debt to income ratio at the HIGHEST of 36%.

Again, we will use the $50k yearly income as an example.

Plugins:

Yearly salary – $50,000

Debt to income ratio allowed – 36%

$50,000 / 12 months = $4166 monthly gross income

36% of $4166 = $1500

This is an important number. I say this because you are able to control this number. Paying off your car, paying off credit cards are two ways to help this number go lower. Remember, 36% is the HIGHEST ALLOWED (usually) debt to income ratio allowed. Having a 20% debt to income ratio would be advantageous as you show your responsibility and the fact you do not have unnecessary debt.

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Being a Tenant vs Being a Homeowner

A large difference as a new homeowner is receiving a bill when the handyman comes out and replaces or repairs something.

Reality Check: You pay him out of your pocket.

No more are the days of calling the maintenance guy and coming home to a brand new kitchen faucet.

Now it’s your responsibility to maintain, repair, replace and keep your home livable.

Two things you will have to come to terms with:

Are you mentally/emotionally able to withstand the fact you have 100% of the responsibility of the inside and outside of your home?

Are you financially able to replace a hot water heater or pay for pest control on a quarterly basis?

I do not want to paint a rosy picture that home ownership is a la-la land of sweetness.

Yes, owning your home is a large step in the right direction of being independent and an adult.

With that being said, life happens.

My first year of home ownership I woke up to half an inch of water throughout my whole kitchen. A month later I found a rat walking around my kitchen floor at eleven o’clock at night. These were two situations where I had to put my “big boy pants” on and deal with them.

I went to the hardware store and bought the necessary part to fix my leaking fridge. I went to the feed store and purchased some “rat candy” to feed my furry intruders.

In regards to handy things, I am no Macgyver. I still have to call upon others and ask for help. But the frustration about the water in the kitchen AND the rodents was very real and this is a REAL emotion and hurdle you will have to overcome in owning a home.

Rant over… for now.

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Yearly Ongoing Costs

A standard average is 1% of the home’s value will be used on yearly incidentals. These are things like: calling the handyman to fix the faucet, buying a faulty appliance, light bulbs, air conditioner or furnace/heater tune-up. Nearly anything that can break or needs service falls into this category. Example below:

Home value – $200,000

Yearly ongoing costs – Standard 1%

1% of $200,00 = $2000

$2000 / 12 months = $166 monthly

I begin saving this $166 each month and putting it aside for when the incidentals do happen.

I promise you. They will happen at the most inconvenient times.

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How Old Is the Home?

The older the home the more the ongoing costs.

The newer the home the less you will have to pay for ongoing repairs.

That is simple.

The reason the home built more recently will need less ongoing work is newer building codes and oversight that did not exist decades ago.

My first home was built in 1959. Let’s put it simply and say: it needed work.

I had new floors, paint, countertops, cabinets, kitchen sink, bathroom vanity and tile and other things replaced in the first year. If you buy a home that was built before 1990 be ready to remodel.

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Down Payment: How Much Money Have I Saved?

Most lenders want 20%. This will save you on private mortgage insurance.

I won’t do the math for you. Know that if you have saved 20% of the purchase price you are well on your way to being a homeowner.

First Things First: Yearly Financial Plan

Before saving for a home you need to be in a strong financial position. This begins with forecasting. I have written a post on preparing for a year financially and a step by step video on how to do it.  Before the home becomes a reality you need your finances in order.

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Conclusion

What other questions should you ask yourself?

First-time homeowners, what funny/tragic/crazy stories do you have to share during your first years of ownership?

Any other thoughts on the debt to income ratio?

Do you have any other ways your saved/prepared before buying your first home?

Leave a comment and start a discussion below.

Always Moving Forward,

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