Not knowing what you can afford can be a major stumbling block as you try to navigate through the home buying process.
Buyers can be best served by finding their current credit score, cleaning up any negatives on their credit report, keeping account balances below 30% of their limits, saving enough for a larger down payment, and by getting pre-approved for their loan. Doing these things will maximize your borrowing power while minimizing your interest rates and other costs.
Many first-time buyers will casually look at their budget, guess how much of a mortgage payment they think they can afford, and then calculate the size of loan they want to go for, based on that monthly payment amount they calculated. The problem with this is first-time buyers often do not anticipate the additional expenses that go beyond the down payment.
These expenses may include an earnest money deposit that keeps the buyer from seeking other offers while you are negotiating and waiting for processes. An earnest money deposit may be as much as 3% of the purchase price. Let’s say the purchase price of the home is $200,000. A proper earnest money deposit may be $6000.
Closing costs of the loan are typically 2-5% of the purchase price. On that same home, the closing costs could be between $4000-$10,000.
Expenses may also include any prepaid interest and upfront escrows for property taxes and homeowners insurance. These can be in the hundreds to thousands of dollars each.
Expenses can include ongoing monthly homeowners’ association (HOA) fees. HOA fees often range from $200-$400 per month.
You should include an inspection for around $500-$800, and appraisal fees which could be at least a few hundred dollars.
While it’s not required, another good rule of thumb is to have 2-6 months of cash reserves equal to the new house payment. This is for unforeseen incidentals like repairs, home improvements, and temporary loss of income.
Armed with the knowledge of these extra expenses, and knowing that you have prepared for each one of them, will help you search for a house you can afford, make a proper offer, know where you can negotiate, and could end up saving you a lot more money.
As with any challenge that might arise, get more information, seek the advice of a professional, and prepare yourself with confidence.
We’d love to help get you into your first home, paying as little as possible.
We'll be here for you every step of the way. Give us a call at 801.542.0961 or fill out our quick & easy pre-qualification form!