The new year is almost upon us; what are your goals for 2019? Is becoming a first-time homeowner on your list? If so, you need to know what to expect from the financial journey ahead of you when getting your first mortgage. Having purchased two homes now (first as a single gal, and later with my husband), I’ve been around this block a few times.
Getting your first mortgage is a little easier if you have some idea of what to expect before you jump feet-first into the process. As the first post in a multi-part series on tips to buying or selling a home in the new year, I hope you find this sneak peek helpful as you prepare to become a homeowner!
This is a collaboration post. However, please know I stand behind everything written here, and only include links to products/services/resources I’m willing to recommend personally. Also please remember that I’m neither a mortgage broker nor a financial advisor. The information in this post is just that – general information. It is NOT a substitute for consulting your own financial professionals about the options that best fit your unique circumstances.
Getting Your First Mortgage in the New Year
Improve Your Credit (Score)
Get a copy of your credit report from the major credit bureaus and check to make sure there are no errors. If there are, reach out to the credit bureaus to get the errors fixed. Then figure out what you need to do to improve your credit score.
If you have outstanding loans or credit card balances, see if you can pay those down, or eliminate them completely, one at a time. (My blogging friend Sarah has TONS of great advice on how to get your finances under control at her blog Lemon Blessings.) If you have a hard time living within your means, start by seeing what regular expenses you can trim or eliminate from your life:
- Coffee out several times a day?
- Lots of fast food instead of home-cooked meals?
- That cable or dish subscription?
- Your current cell phone plan?
Call your phone company, electrical supplier, internet provider, and auto insurer at least once a year to see if you can negotiate a better rate. Do the math on your family’s health insurance; would a higher-deductible plan save you more money than the lower-deductible options?
Why are these things important? Having better credit scores can help you qualify for better mortgage rates. This means you’ll pay less in interest over time. Also, after the financial downturn of last decade, it can be hard to qualify for ANY mortgage in some parts of the U.S., as my brother and his wife (who had super credit scores and a decent down payment) learned a couple of years ago.
Saving a Down Payment
Once you’ve cleaned up your finances, it’s time to think about how much of a down payment you’ll need to save up. For a conventional mortgage in the United States, you’ll need at least 20% of the selling price as your down payment. (In other countries like the U.K., this down payment or “deposit” is as little as 10% for a “standard” loan.)
Having a 20% down payment will give you access to the best borrowing rates, and may make it easier to secure a loan. Any less than that, and with a conventional mortgage you’ll need to pay what’s called “PMI,” or private mortgage insurance, until your home equity equals at least 20%.
However, there are other options besides conventional mortgages for becoming a homeowner, even if you don’t have 20% to put down on your new house. These include:
- Loans through the Veterans’ Administration (VA) or the U.S. Department of Agriculture (USDA), for those who qualify;
- A “piggyback” or “80-10-10” mortgage, which enables qualified U.S. residents to avoid PMI with just a 10% down payment; and
- Special options that may be available depending on your profession, where you live, whether you belong to a credit union, or who your employer is.
For example: Some small private institutions want employees to live super-close to work as part of neighborhood-revitalization partnerships. When my husband bought his first home, he got away with zero down payment because his employer vouched for him through such a program. This helped him avoid PMI on a house that was four minutes’ walk from his office. His employer also gave him a $10,000 down payment toward his home, in the form of a “loan” that his employer forgave at $2000/year for each of his first five years in his house.
Plan Your Payments Carefully
As you’re weighing mortgage options, make sure you have a plan to meet your monthly payments. Talk with a mortgage broker before you get too far in the house-hunting process, so you know what you can realistically afford. I’ve never met a Realtor who wasn’t eager to get a customer into the most expensive home possible, even if it would be a stretch financially. Resist that temptation.
One way to try to make sure you can afford your payments, if you’re a couple who both work, is to see what kind of monthly payment you could qualify for based on only one person’s income. When my husband and I bought our current home, my job contract was about to expire and I was pregnant with Kimmie. So we applied for our mortgage based solely on his income.
You can also figure out what sort of side hustle or secondary income stream you’ll use to help you make the payments. I first became a homeowner in grad school, when I could no longer afford to rent a one-bedroom city apartment. My monthly mortgage and fees on my two-bedroom condo, 20 minutes outside the city, was equal to my total rent on my landlord’s proposed new lease. I rented the extra bedroom to another grad student, thereby halving both our housing costs.
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Likewise, my dear friend Raiah lives in Toronto, where housing prices are outrageous and vacancy rates are low. Like many other Toronto homeowners, she and her husband rent out their basement to a tenant, which helps them cover the mortgage.
Keep Other Costs In Mind Before You Buy
Your monthly mortgage payment is crucial when determining how much house you can afford, but it shouldn’t be the only consideration. You also have to account for:
- Homeowner’s or association fees, if your new home will be part of a private community or housing development;
- Your prospective costs for homeowner’s and auto insurance, based on your new zip code;
- What your real estate, school district, and municipal taxes will be;
- What everyone’s commuting costs will be to work and/or school, and whether telecommuting is an option;
- Whether the school district will meet your students’ educational needs, or whether you’ll need to send your child(ren) to private school;
- If you’re looking to buy in an area that borders multiple states, how taxes/fees/services compare from one state to the next.
Once you add in all of these extra costs, you may find that you’ll be spending much more than the recommended maximum of 1/3 your income on housing costs. Or, conversely, all these “extra” “hidden” costs may make what seems like a more expensive mortgage payment upfront well worth it, because of what you’ll save elsewhere.
Ways to Hack Your Monthly Payment
Once you’re a proud homeowner, you NEED to make all those payments on time, every month, no matter what. Fortunately, there are several ways to tweak that monthly payment to make your life easier, and/or save yourself money in the long run.
For starters, consider setting up your mortgage payment as an automatic monthly withdrawal from your bank. Also see if you can include your homeowner’s insurance and real estate taxes in your monthly payment. We did this; those parts of our mortgage payment go to a separate escrow account. Then our lender pays these bills for us as soon as they’re due. This means we don’t have to shell out large chunks of money several times a year for these bills.
Another option is to see if you can pay your mortgage twice a month (e.g., 1st and 15th). Bimonthly payments will help to pay off your loan’s principal (the actual loan amount) sooner. This will reduce the amount you pay in interest over time.
So will rounding up your payment each month – for example, from $892 to $900, or from $1574 to $1600. Anything extra you pay each month will go toward the principal, and help you finish your mortgage (or get out of PMI) sooner.
Finally, you might consider using a credit card to pay your mortgage. You don’t want to do this unless you’re already in the habit of ALWAYS paying off your full balance every month. But if you always pay off that monthly total on time, you can up your credit score just by paying your mortgage. Use a rewards card, and you’ll also earn cash back, travel miles, or points at your favorite retailer.
Factor In Renovations
Finally, before you buy, don’t forget to account for renovations. Whatever home you buy will most likely need SOMETHING done to it to make it the way you like it. You should think about this as you look at potential homes. If you’re in a “buyer’s market,” you may be able to negotiate a better deal on the selling price, or get major repairs taken care of before you close on the house.
On the other hand, a house that needs a lot of cosmetic work will probably sell for less than one with everything up-to-date. If you have the time and inclination, you can take care of these renovations yourself before you move in, and save money. When I bought my condo, I repainted the entire thing top-to-bottom, with help from my mama and brother, and designed/installed custom closets. When my husband and I closed on our current home shortly before Kimmie was born, we had most of the carpeting replaced with hardwood floors before we moved in.
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With both homes, I set aside an extra $10,000 in cash reserves as part of mortgage planning, to use on updates like painting and new floors. This may seem like a stretch, but it will help you get a home that you’re happier with, often for a much better price than having the seller do all the updates for you. Whatever renovations you consider, be sure to hire a reliable company if the work is beyond what you can handle. This will save you from wasting money down the line.
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What did I miss? If you’ve bought a home, what other advice would you have for those seeking their first mortgage in the new year? Let us know in the comments!
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