Purchasing your first home can be a challenge to navigate and understand. Instead of walking straight into the labyrinth, let us give you some pointers on where to begin the mortgage process.
The first thing any homebuyer should consider before anything else is determining what mortgage payment can fit within your budget. You can start with either a piece of paper or an excel sheet and begin by writing down your monthly household income. Listing out individual incomes can be helpful with determining how much of the mortgage will be coming from each person.
After you have determined your household income you can begin to list your expenses. Be sure to begin your list with all current debts that you may have, as these are non-negotiable payments you must make. These include, but are not limited to:
- Car Payment
- Credit Card Payment (Monthly Average, typically includes personal care expenses)
- Medical Debt
- Student Loan Payments
- Child Support or Alimony Payments (if applicable)
Now that you have listed your debts be sure to include all the expenses you will need to cover first. If you do not live on your own, do not forget to include household expenses that come with owning your own home. This can include, but are not limited to:
- Trash Removal
- Anticipated Annual Home Maintenance (chimney, heating, ac, pool, etc.)
- Internet, TV and Phone
- Cost to maintain and use your vehicle
- Monthly/Annual Subscriptions (List out in detail for easier review)
- Retirement savings
- Child Care (if applicable)
- Pet expenses (if applicable)
- Spending on non-essentials (such as vacations, dining out, and activities)
- Gifts or Donations (includes birthday gifts, Christmas gifts, donations, etc.)
Once you have collected all your household expenses and debt obligations, you can now subtract the expenses from your household income. This number left over is what can be used for the monthly payment for the mortgage, property taxes, and homeowner’s insurance. If this number is negative or lower than expected, this is the time to review your budget to see what non-essentials you can cut back on. You might need to detail out each of your credit card expenses to see what you might be spending the most on that can be cut back.
Combining the mortgage, property tax, and homeowner’s insurance into one number can reduce the risk of having an unexpected expense once you move in. Here is an example of what each expense could be and add up to, a $300,000 home could have an insurance cost of around $110, property taxes of around of around $310, and a mortgage payment of around $1,265 at 3% interest*. This would make the monthly payment in your budget for all the housing costs $1,685. If you are considering a condo, keep in mind they may have Homeowner Association (HOA) fees which are in addition to the mortgage, taxes, and insurance payments. HOA fees can range from $100-$400 a month depending on the services included. These services can include but are not limited to snow removal, yard maintenance, exterior maintenance, common area maintenance, etc. Missing any one of these expenses could drastically impact your overall budget if you had not accounted for it.
Another important thing to consider is the impact that interest rates can have on a mortgage. For example, a $300,000 home can have a mortgage payment of $1,265 at 3.0%, $1,347 at 3.5% or $1,432 at 4.0%*. Roughly a $82 increase in the monthly payment for each half of a percent increase in the mortgage interest rate.
Now that you determined how much you can afford in your budget, you can research different mortgage type options and see what you can qualify for. As first-time home buyers you might qualify for programs such as a Federal Housing Administration (FHA) loan, traditional loan, or rehab loan. You can search what government assisted programs you are eligible for on mymassmortgage.org. You can also reach out to a local financial provider to see what programs they offer that you may qualify for. Visit alltrustcu.org to see what programs we offer.
Once you have a pre-approval letter and an understanding on what you can afford you can begin your home search.
Best of luck searching!
*The numbers used are estimates for educational purposes only and is not intended to purport actual user-defined parameters. The default figures shown are hypothetical and may not be applicable to your individual situation. Be sure to consult a financial professional prior to relying on the results.
** The information provided by these calculators is intended for illustrative purposes only and is not intended to purport actual user-defined parameters. The default figures shown are hypothetical and may not be applicable to your individual situation. Be sure to consult a financial professional prior to relying on the results.