Buying your first home? Here’s what you need to know

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First-time homebuyers have a steep learning curve to go through, from understanding true affordability and how to qualify for a mortgage to managing their post-purchase cash flow.

“When buying your first home, you need to consider that the amount a lender will let you borrow may not necessarily equal the amount you can afford,” said Eric Roberge, a certified financial planner and founder of Beyond Your Hammock in Boston.

While most banks will allow you to take out a loan paying back around 30% of your income, Roberge advises clients to keep their annual housing costs (mortgage payments along with property taxes, homeowner insurance and annual maintenance) at 20% of their gross income. .

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“In today’s environment, they’re buying pay, not purchase price,” said CJ Harrison, CFP, vice president of DecisionPoint Financial in Mesa, Arizona. “But they have to keep in mind that these are super inflated housing prices.

“I ask these clients, ‘Can you financially survive a catastrophic drop in the value of your home?’

To bring his clients down to earth, Brian Mercado, CFO of JSF Financial in Los Angeles, offers them an exercise.

“I tell them that while they are looking for a home, they should try to live like they are already paying more,” he said. “It’s a stress test for their cash flow.”

While buyers get used to the new budget, Mercado invests excess monthly savings so that it can be added to the down payment.

You don’t want to outgrow your new home, says Stephanie Campos, CFP, owner of Campos Financial in Miami. She asks clients questions such as “Will this house serve your needs for more than five to ten years?” and “Is the mortgage and closing costs worth it if you need to buy another home in a few years?”

Mortgage advice

Before applying for a mortgage, it’s important, if necessary, to clear your credit score, Campos said.

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Campos advises those looking for housing with a credit score below 600 to look into mortgages. Federal Office of the Interior. They are aimed at first-time homebuyers who find it difficult to save up the 20% down payment needed to avoid private mortgage insurance, she said. FHA loans may require as little as a 3.5% down payment, but have slightly higher rates and certain payment and income requirements.

A way for buyers to avoid having to get private mortgage insurance or PMI, Mercado said, is to take out two separate loans, i.e. a mortgage for 80% of the required amount and a home equity line of credit for the remainder.

Be patient before you start spending money after a purchase.

CJ Harrison

Vice President DecisionPoint Financial

Mercado also encourages buyers to request multiple prequalification letters from lenders for different amounts for different negotiation strategies. For example:

  • If you don’t want to tell the seller that you can pay more, use a letter that lists only the amount needed for the purchase.
  • If you are in a bidding war, use a letter with an amount that shows the seller that you can go higher.

Buyers should have multiple copies in case they need to make an immediate offer, Mercado said.

Mortgages are one of the “most competitive areas,” Harrison said, “so get a breakdown of costs and show it to other lenders.”

He advises buyers to obtain quotes from at least three mortgage sources and request a fee table, which is preliminary and does not require a credit check, and/or a credit score, which is mandatory and requires a credit check.

After you buy

Harrison said he should reassess his post-purchase spending as furniture, yard maintenance and renovation costs are high due to demand driven by a hot housing market.

“Be patient before you start spending money after a purchase,” he said. “Set your pace and keep your reserve fund – and plan for future purchases instead of spending all your money.”

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