Purchasing a home can be a HUGE task – especially for a first-time homebuyer.
In hundreds of financial counseling sessions, I may not have seen it all, but I have seen a lot. So here are some tips to make your home purchase a winner.
- Don't buy a house that has a total house payment (principal, interest, insurance, taxes) greater than 25% of take-home pay. The bank will lend you far more than 25%, but trust me. If you go purchase a house that has a payment of more than 25%, you will start really feeling a pinch on your overall lifestyle. Your entire existence will be focused on making the house payment.
- Put down at least 5% of the purchase price. Even better, make that 20%. You can purchase a house with 0% down or 3% down, but to obtain a conventional mortgage with the best rates, you will need to put down at least 5%. However, if you do not put down at least 20%, you will have to pay PMI (private mortgage insurance) and that will cost you $500 to $1,000 or more more year!
- Buy a house that is at the average or lower of the other houses in the neighborhood. This allows better opportunity for your house to increase in value. When you are the largest and most expensive house in the neighborhood, you stand a good chance of have a decreased growth rate in your home's value.
- Wait overnight before signing a contract on a house. You will think more clearly about a house when you have slept on the purchase decision. It also puts separation between you and the emotion of the house. This allows you to make sure it is a good financial decision.
- If you are not convinced that you will be in the house for two years or longer, consider NOT purchasing a house. Renting is so much easier in short-term situations. Yes, you might have to pay to break a lease, but it is WAY easier than preparing a house to sell, actually selling it, and then closing on it.
OK commentors – What are some tips you want to add?