Buying Your First Home, Part 1: How Much House?
By P. Andersen, 8/20/14
I am in the process of buying my first house. It is an exciting time of looking forward to a new life filled with ideas, hope, and of course, terror. I am starting late in the game, having lived in Manhattan through my prime “Home Buying Years”, where $700,000 buys you a spacious (Almost 1000 sf!) one bedroom in a good building, and where even that one bedroom was outside my budget. So, time passes, circumstances change, and new opportunities arise. Here I am, several years later, faced with something I had only conceptually thought of before. I felt it might be useful to some of you out there if I took you along for the ride, because if you are looking for your first home, you might learn from my mistakes.
The Insurance Piece
Clearly, I work for an insurance agency, and we generally discuss insurance in this blog. Let’s get that out of the way right here. Homeowners insurance? You need it. It is pretty reasonable in the big scheme of things, and you should have an expert place the policy with a good carrier that can be counted on in the case of a loss. You want to be sure to have a valuable articles policy for your unique items (art, wine, jewelry), but you knew that from our previous blogs. Next, you need to know what your flood zone is, because you have to budget flood insurance if you are in a higher risk area. Get the details on the town and the lot and its history before making an offer, and read our flood blog for additional information. Also, did you know that your auto insurance will be impacted too? I am moving from the Bronx, and my auto insurance will dip a few hundred dollars after moving to a quiet Westchester hamlet. It is a nice little bonus, and offsets some of the difference between renters and homeowners insurance. Call us, Levitt-Fuirst has a wonderful personal lines staff, and we want to be there for you when you are ready to buy that first (or second or vacation) home.
So, that was the insurance piece! To be honest, in the big scheme of things, the insurance part is easy if you have a trusted insurance advisor guiding you. It is all the other stuff that rattles your teeth and makes you question getting up in the morning. Today I am going to give a few tips on preparing you for your house search, because walking into this process with eyes wide open will help you keep your sanity!
How Much House?
Before you buy a house, you have to know what you can afford. Seems silly, but this is where so many people (like me) miss essential bits of information that truly impact what they can afford. First, your credit is a key piece to this whole puzzle. If you have great credit, you are ready to move on to the next step. If you don’t, taking a year to improve your credit might be wise. The rate you pay for your mortgage, for the next 30 years, will be directly related to that 3 digit number! Taking steps to improve your credit for a year might just be the best financial decision you can make. Also, did you know a better credit score could improve your insurance rates as well?
Once you are set with your credit score, it is time to evaluate the actual dollars and cents. Your ongoing costs include the cost of the mortgage itself, the estimated cost of the taxes for the town you will be living in, and the cost of the PMI, or Mortgage Insurance, if you are putting down less than 20%. Up front, you have the down payment, from 5% to 20% for a standard “conforming” loan, and legal fees and closing costs, which can add up to 4% to 7% of the total cost of the property. That down payment and closing cost figure is all right up front, and constitutes a hefty investment for a prospective new home owner. The numbers can be an eye-opener in this region, where $500,000 is considered a reasonable home price…
With all of this information, you should have a better idea of what you can afford. Taking that conceptual number, it is time to get pre-approved for a loan. If you are serious about buying a house this is where the rubber meets the road. This is where you will find out what sort of rate you can expect, which will clarify how much house you truly can afford. You can get these mortgage quotes from an institution you regularly use or have a relationship with, or you can shop for mortgages using the various tools available, such as Quicken Loans or Lending Tree. However you choose to get your indication, doing so before you start your house hunt is an excellent idea – when you find your perfect home, you want to be able to move quickly to secure it.
Are you tired yet? All of that, and we haven’t even looked for a house? No wonder this will take a blog or two to cover… Next week, Part 2 will discuss finding your home, and the tools that will help you do it. Finally, we will discuss the time between contract signing and closing, and which wine regions offer the best wines for keeping you sane during this process.
Links:
Credit Score Companies
Improving Your Credit Score in a year
Getting To Know the Towns of New York State
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