I was asked to post a piece about the basics of financing a home. I will use my experience (personal and professional) to help list some basics when looking to buy a home and the responsibility of being a home owner I will talk about "A"paper type loan scenarios, basic lending, no creative financing.
#1. Have a job (a good job,a career job) for at least 2 years.
#2. Have good credit, (pay those you owe money too) on time. Work to clear up anything in default.
#3. What can I afford?
In my area the Sunday paper (in the real estate section) has a table of interest rates and payments. This table breaks down how much your payment will be based on what you borrow and what the corresponding interest rate is. For example for every $100,000 borrowed at an interest rate of 7% will translate to a payment of apprx $700/mo. for a 30yr fixed rate term. (6% is apprx $600/mo). Or call a lender.
Example: $200,000 loan amount is apprx 1400/mo. (30 yr fixed rate)
There are ratios that must be met:
Apprx. 30% of your income is the amount that should be spent on your house payment (including taxes and insurance)
Apprx. 40% of your income is the total that should be used to pay all other bills (credit cards, cars, etc) depending of the loan structure it could rise to apprx 50%.
Therefore, if you make $5000/mo then no more than $1500/mo should be your house payment (including taxes and insurance). Your total other bills should be no more than another $500/mo. This makes your total outflow $2000/mo or 40% (depending on financing you could be at $2500/mo total outflow (50%)).
Call an Insurance agent and ask what insurance would cost in a given area and certain purchase price. Contact you taxing authority to determine what your property taxes will cost. (divide these amounts by 12 to get a monthly amount)
Find out about Home Owner Association fees, or CDD's or any other community fees (these count towards your housing payment)
#4. Contact a Lender (after doing some homework and finding that the above criteria has been met). Take the time to fill out or give an application (fax all required documentation to your lender asap) and get an underwriting APPROVAL, it may require an application fee, but this will let you know if you are credit worthy. Then stop buying..... anything.
A lender will use their resources to find the best product to meet your needs (First Time Home buyer programs, bond money, structuring the deal to make it work for you.
Be conservative, you don't need to move into a mansion right away, don't buy on the assumption that you will be making more money later (if and when that happens you can move to a larger home if thats what is important to you). Historically, property has increased in value, whether you are in a big home or smaller home you will see some appreciation in value.
#5. Find a Realtor. Take your lenders APPROVAL (again an approval seen by an underwriter) with you to your Realtor, this will let the Realtor know what they need to do to show you properties that are in your price range.
Ask your realtor to check any community fees and double check property tax figures.
#6. Close and Move in, still don't buy anything (unless its a necessity) you need to get used to your new financial situation and how money is allocated throughout the month. This is a home, you will have plenty of time to add things to it.
#7. Home ownership, you need to realize that there is grass to cut and fertilize, pest control, furnishings, carpeting/flooring, roofing, repairs of all kinds, A/C, plumbing, water heaters, painting, window treatments, and the list goes on. This is one of the biggest investments you will make, TAKE CARE OF IT. There is no landlord or parents to take care of things. This is your responsibility.
Ask your realtor (if not already done) to ask the previous owner to find out as much about what you are buying. Ask for homes with a Home Warranty. Do not fall for every home improvement product that you will be solicited. Do research before buying anything major for your new home. Ask your realtor to contact the previous owners if something goes wrong early in your ownership period. Things WILL GO WRONG, its a house, it happens.
#8. Its worth ever minute. ENJOY IT.