First Time Home Buyers Tips: Part 1
What a big decision! You've decided you want to buy your first home. Having helped many first time home buyers I think I understand the excitement, nerves and anxiety that comes with that decision. Below is the first of three areas with some ideas of how to best set you up for success.
How am I going to afford a home for $400,000?! How does anyone afford a home for $400,000?! The power of a 30-year fixed mortgage. Put a little money down today, and then for the next 360 months, pay "affordable" installments to pay off the mortgage.
There are some loan programs that allow you to put $0 down (VA and USDA loans) but most require a minimum of 3% down.
Example: $400,000 *.03 = $12,000.
So for a $12,000 down payment you can buy a home. That $12,000 is not all that you need or should have though, to buy the property. Unless you and your agent negotiate in seller credits towards closing costs, you as a buyer AND borrower are going to be required to pay closing costs when you close on the loan. These costs can be between 2-3% of the loan amount.
Example: $400,000 with 3% down payment = Loan Amount of $388,000
$388,000 Loan Amount * .02 = $7,760 in Closing Costs
That $7,760 is in addition to the $12,000 you are being asked to put down on the property. These closing costs include title company fees, lender fees, prepaid expenses and other fees. We are now at an amount of $19,760 to buy a home valued at $400,000.
I'm not going to stop there financially though. In a world such as today, it has never been MORE important for you to have reserves. The safest thing you could do to put yourself in a position of safety is to have 3-6 months of ALL living expenses saved. To keep it relevant to buying your first home, this means having 3-6 months of mortgage payments set aside.
Example: $400,000 Purchase price with a loan of $388,000 on a 30-year fixed mortgage at 3.25% Interest Rate:
Principal and Interest: $1,688
Private Mortgage Insurance: $150 *with only putting down 3%, your lender will require you to pay private mortgage insurance. For a time until your loan balance reaches 75-80% of the purchase price OR when the equity in your home is 20% or greater (can get an appraisal after 12-24 months if you feel this has happened).
Total Monthly Mortgage Amount: $2,188 * 3 Months = $6,564
Total Monthly Mortgage Amount: $2,188 * 6 Months = $13,128
There are affordable home ownership programs out there (down payment assistance and grant programs), but I am not the biggest fan. I am of the opinion, that yes, it does cost a lot to buy a home, but it puts the weight of the decision at a place where it needs to be. It's a heavy decision to buy a home and should not be taken lightly. With that being said, considering the discussion above, to buy your first home, here is what you should expect monetarily on a $400,000 home:
Down Payment: $12,000
Closing Costs: $7,760
3-Months Reserves: $6,564
Total Needed to Buy First Home: $26,324
I can tell you, this number sounds big. But it is reality. There are strategies you could explore (down payment assistance, negotiate closing costs, do not have reserves) that could dramatically decrease the amount needed out of pocket. I'd absolutely look at negotiating closing costs, but you will generally have to increase your offering price to offset the closing costs that you are asking the seller to pay for you. It does allow for you to bring less $$$ to the table, but increases your purchase price, loan balance and monthly mortgage (minimally).