Buying a home nowadays can be a real challenge, but its benefits still outweigh its costs. When you buy a home, you have the freedom to renovate it, decorate it, and rent it out as you please. You also have the option of scaling the property ladder in the future – the more money you pay off on your home, the more you have to use as a down payment on a future property.
In order to buy your first home, you need to make sure that you’re in the right financial position. You can then start looking for the right property and preparing for the move. Here are just a few questions to ask yourself to help you determine if you are ready.
How much can you afford to pay upfront?
The biggest upfront cost when buying a property is the down payment. It’s a myth that most mortgage lenders expect at least 20% of a property’s value – the average down payment on a home nowadays for first-time buyers is actually closer to 12%. The average first time home meanwhile costs $219,300. Going on these figures, this would suggest that the average down payment costs $26,316.
On top of the down payment, there are other costs to consider such as surveyor fees, appraisal fees, and home inspection fees. These can end up costing a few more thousand dollars bringing the average upfront price of buying one’s first house to about $30k.
This is a rough average – you can buy a home for much less than this depending on what property you’re buying and what mortgage you’re using. That said, you’re still going to want a fair amount of savings. This guide at The Simple Dollar offers advice on how to save up for a down payment.
How much can you afford to pay per month?
On top of the upfront costs, it’s important to consider the monthly costs. You don’t want to be struggling to keep up with mortgage repayments because you’re not earning enough a month. In most cases, you’ll find that lenders reject you unless you’re earning a certain income. They’ll also take into account other outgoing costs.
Monthly mortgage payments for first-time buyers tend to be over $1000 per month. The higher the down payment, the lower the monthly repayments. On top of budgeting for the monthly repayment, you also need to consider all the other household expenses ranging from energy bills to potential home repairs. This can vary depending on the property.
How do your finances look on paper?
A mortgage lender will approve or reject you largely based on how your finances look on paper. Most lenders ask for six months’ worth of previous bank statements – so it’s worth making sure that your finances look healthy for these six months beforehand.
A few of the things that can make your look good on paper include:
· Few or no missed payments
· A good cash flow (more money coming in than going out)
· Few debts
· No unexplained payments
Your credit score may also have an impact on whether you are approved or rejected – this is largely based on how good you are at making regular payments on time. There are low credit mortgages out there for people who have a fairly low credit score, but these can have higher interest rates. There are also other schemes out there that you can use to improve your credit score.
What mortgage options are available?
Mortgages come in all shapes and forms. 30-year fixed-term mortgages are the most common mortgage taken out by first-time buyers, but there are many other types of mortgages ranging from 10-year balloon mortgages to even 40-year mortgages.
Some mortgages ask for high down payments of as much as 40%, while others don’t ask for a down payment at all. Interest rates meanwhile can also vary from mortgage to mortgage.
With so many options out there, it’s often worth hiring a mortgage broker such as Altrua to help you compare loans and find the best mortgage rates. Mortgage brokers sometimes have access to exclusive deals that you won’t find on the market. You’ll pay a fee to use their services, but it will generally still save you a lot of money.
If you don't have much money to put on a down payment, have a poor credit score, and don’t have much disposable income, you could struggle to find a mortgage that accepts you. Any that are willing to take you on will generally charge high-interest rates and fees, so you’re likely to pay a lot more in the long run.
It’s worth applying for a mortgage before you start looking at property. You can look at the property before applying for a mortgage, but if you want to put in an offer you’ll want a mortgage already set up.
What type of property would you like to buy?
Before you start looking at property, it pays to know what you’re looking for. Start by establishing where you want to live and then consider the types of property you’ll be willing to accept.
You could find that your money doesn’t go very far in a trendy city area, but if you’re willing to venture out into the suburbs or even somewhere rural, a lot more options may start to open up. Some first-time buyers are happy with a small apartment if it allows them to afford a city location. Others have their heart set on a three-bed house – this generally requires searching further afield and not being fussy about the location.
List the features that you need and the features that you want. It could be important that you are able to commute to work from your home in less than an hour or you may need space in your home to grow (if you want kids soon, a second bedroom could be essential). Other features may not be necessary, but could still be worth looking for as extra perks. Such features could include distance to amenities, parking options, local noise pollution, and the placement of the backyard (does it slope and when does it get the sun?).
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What type of properties is available on the market?
This is the exciting part – seeing what types of properties are out there. There are many different property listing sites that you can peruse as listed at Contactually that can help you to compare available properties. You can also try browsing various real estate agents shops in your area and seeing what properties they have listed.
You may find that there are lots of properties out there within your budget that meet your demands. Alternatively, you could find that there’s nothing out there that fits the bill.
If lots of properties catch your eye, you can start arranging viewings and getting a better feel of each one. Ask lots of questions to the agent/ seller so that you have as much information on each property. Once you find a property that you’re interested in, consider taking things forward and arranging a home inspection and appraisal (these will tell you if the property is in good condition and if it really is the value that the seller claims it to be).
If no properties seem suitable, you may have to consider putting off your plans of buying until something comes up or until you can save up enough to afford more options. Make sure that your expectations aren’t too high – your first property doesn’t have to be your home for life and, providing that you are fairly young, there is always time to climb the property ladder.
Is now a good time to buy a home?
Timing is important when buying a home. It’s a lengthy and stressful process, so you don’t want to have too many other major events coinciding such as starting a new job, getting married, having a baby, or arranging a funeral for a loved one.
It’s also important that the property market is in good shape. Disasters such as Covid-19 had many people expecting a property crash, but that didn’t happen and now actually seems to be a good time for buyers. There could still be disasters in the future and it’s important to always do your research to see how these may be affecting property prices.
Have you had experience living independently?
If you’ve had experience renting a home by yourself or with friends/a partner, you’ll already know how to cook, clean, and look after yourself. The only real change is likely to be managing your own home repairs (if you buy a property in good condition, you shouldn’t have to worry too much about this).
If you’re moving straight from your parents’ home to a home that you own, then it will be a much bigger leap. Make sure that you’ve got some basic life skills mastered such as cooking basic meals, washing your own laundry, and managing bills. This will prevent moving out being such a shock to the system.