Considerations when buying your first home
Provided by MidAmerica Financial Resources
So, you’re looking to purchase your first home …. Congratulations. This is a very exciting time, as you look to escape the “renter” moniker and become a homeowner.
While going on open house visits and researching neighborhood data is important, equally — if not more so — is making sure that the purchase is a financially sound one. Here are a few things to keep in mind as you go through the process.
How Much Can You Afford?
Let’s start by considering a price limit. Unless you have cash to purchase the home outright, you’ll be taking out a mortgage. Lenders will look at your income and expenses to determine whether you qualify for the loan that you’re requesting.
Lenders look at two general ratios: housing expense and total obligations. In the housing expense ratio, they’ll look at your total housing costs — monthly mortgage, insurance and property taxes — and compare it to your gross monthly income. As a general rule, this ratio should not exceed 28% for the banks to look favorably on the loan amount.
Next is the obligation ratio. This looks at the percentage of your income that is necessary to cover your monthly debts and housing costs. The obligations include student loans, installment loans, older credit balances, all of which are added to your basic housing costs and divided by your gross income. This ratio should not exceed 36%.
Additionally, you may need to make a down payment on your purchase, which can vary up to 20% of the sale price. Generally, if you’re able to put down 20% or more, you’ll receive a lower interest rate and avoid having to pay private mortgage insurance.
Closing Costs
You’ll also have to budget for closing costs. There’s a home inspection fee — roughly $250 to $500 —, application fees, an appraisal fee, a survey, title, title insurance, attorney fees, among many others Depending on the home location, you may also have to pay transfer taxes. These can total from 3% to 8% of the purchase price.
Operating Costs
Finally, don’t overlook the costs of owning a home. In addition to your mortgage payments, you’ll pay for utilities, repairs, insurance, landscaping, trash removal, appliance replacement, repairs, and — get ready for it — repairs.
Finally, just because you can afford a house’s selling price doesn’t mean that is what it’s worth. It’s important to survey the values of nearby homes, especially those with similar layouts. The more informed you are as a purchaser, the more financially sound your decision will be in the future.
MidAmerica Financial Resources may be reached at 618.548.4777 or greg.malan@lpl.com www.mid-america.us
Securities and advisory services offered through LPL Financial, a Registered Investment Adviser, Member FINRA/SIPC.
MidAmerica Financial Resources and Malan Financial Group are separate and unrelated companies to LPL.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal.
This material was prepared by LPL Financial, LLC.
