Homeownership is the goal for many of us. There is the nuts-and-bolts side of the journey which involves finances, the mortgage loan (and all that goes with it), and the actual work of operating a household. There is also the personal development side that requires careful planning, diligence, and a willingness to learn. Let’s explore the essential steps to prepare for first time home ownership, the buying process itself, and the ongoing work required to maintain a home and budget.
This is a long list of tips, so we have divided them up into three phases.
Homeownership Phase I: The Prep Work
The first step in preparing for the cost of first-time home ownership is to assess your financial situation. This involves determining your credit score, income, and debt-to-income ratio. These factors will play a critical role in determining your ability to obtain a mortgage loan and the interest rate you will be charged.
1) Improving your credit score
To improve your credit score, you can take steps such as paying off outstanding debts and ensuring that all bills are paid on time. So, what’s a good credit score? A score of 620 or higher is often cited, especially if you are going to be working with government insured loans such as the VA loans, the FHA loans or the USDA loans. It does depend also on the size of the loan, so the larger the mortgage, the higher your credit score will need to be.
2) Optimizing Your Debt-to-Income Ratio
It is also important to have a stable income source and to minimize your debt-to-income (DTI) ratio by reducing your debt and increasing your income. A good DTI is below 36% for conventional loans, and anything higher than 43% will probably make getting a mortgage loan very difficult.
3) Saving Up a Down Payment
Determining how much you need for a down payment is also important but work with a real estate agent on this one. It used to be that 20% down payment was the rule, but that’s changed a lot in recent years. Most first-time homebuyers don’t have that kind of money saved up. It’s kind of a moving target so working with an agent and mortgage lender will help you make sense of the down payment options out there.
Next, you will want to determine how much home you can afford. This involves assessing your monthly income, expenses, and debt obligations to determine how much you can comfortably afford to spend on a mortgage payment each month. You can use online mortgage calculators to help you determine the maximum mortgage payment you can afford based on your income and other factors.
4) Mortgage Loan Pre-Approval
Mortgage pre-approval is an essential step in preparing for first time homeownership, but it’s not an obvious step. If you have a real estate agent on board early, they will strongly advise you to get pre-approved. It is a process in which a lender reviews your financial information and determines how much money they are willing to lend you for a home loan.
- To get pre-approved for a mortgage, you will need to provide the lender with detailed information about your income, assets, debts, and employment history. This information will be used to determine your debt-to-income ratio and creditworthiness.
- There are several benefits to getting pre-approved for a mortgage. First, it can help you determine your budget for buying a home. The lender will provide you with a pre-approval letter that outlines the maximum amount of money they are willing to lend you. This can help you narrow down your search to homes that are within your budget.
- Second, pre-approval can give you an advantage in a competitive housing market. If there are multiple offers on a property, a seller may be more likely to accept an offer from a buyer who has been pre-approved for a mortgage, as it shows that they are serious and have the financial means to complete the transaction.
- Finally, pre-approval can help speed up the closing process. Once you have found a home and have made an offer, the lender will only need to finalize the details of the mortgage, rather than starting the entire process from scratch.
- To get pre-approved for a mortgage, you can work with a lender or mortgage broker. You can shop around to compare rates and terms from different lenders to find the best option for your financial situation.
Homeownership Phase II: The Buying Process
Certainly, the home buying process can be complex, and it’s essential to have a clear understanding of the steps involved. Here are some additional details on the buying process:
5) Finding a Suitable Property
This involves identifying your housing needs, such as the number of bedrooms, bathrooms, and location preferences. You can work with a real estate agent who can help you identify homes that meet your criteria. Alternatively, you can search for homes online or attend open houses.
6) Making an Offer
Once you have found a suitable property, you will need to make an offer to the seller. Your real estate agent can help you determine a fair purchase price and negotiate with the seller on your behalf. You will need to include details such as the purchase price, any contingencies, and the closing date in the offer. If your offer is accepted, it’s time to celebrate.
7) Conducting Inspections
Before finalizing the purchase, you will need to arrange for a home inspection and appraisal. These are two separate visits by two separate professionals. Know the difference. The home inspection will assess the property’s condition and identify any issues that may require repair. An appraisal is an assessment of the property’s value and is necessary for obtaining a mortgage loan.
8) Obtaining a Mortgage
You will need to apply for a mortgage loan and provide the lender with detailed information about your income, assets, and debts. The lender will assess your creditworthiness and determine the maximum amount of money they are willing to lend you for a mortgage.
9) Finalizing the Sale
Once all the necessary documents have been signed, and the mortgage loan has been approved, you will attend the closing. At the closing, you will sign the final paperwork and receive the keys to your new home. You will also need to make a down payment and pay closing costs, which can include fees for the appraisal, home inspection, and title search.
It’s essential to work with a real estate agent who can guide you through the buying process and ensure that all necessary steps are taken. With careful planning and preparation, you can navigate the home buying process and achieve your dream of first-time homeownership.
Homeownership Phase III: Your Budget
Owning a home is a significant responsibility that requires ongoing work to maintain both the property and your budget. This includes making regular mortgage payments, paying property taxes, and maintaining homeowner’s insurance. These are some of the items to add to your homeowner checklist.
10) Monthly Mortgage Payments
Your monthly mortgage payment is typically going to be your biggest expense. If you are looking at first time home ownership as an option, it will be an adjustment. The difference between knowing what you will owe each month and actually paying it can be intimidating. Your loan officer and your real estate agent will help to prepare you for this.
- If you look at your mortgage payment as purely an expense, you may be missing out. It’s more than that. You are paying into a pool of equity that you own, so in some ways, you are paying yourself. Building the equity of your home and property is also an investment in your own wealth, and that equity grows with each payment and as your property becomes more valuable in the market.
11) Escrow and How it Works
Housing expenses can come hard and fast when you are in your new house, so your mortgage specialist may recommend you set up an escrow account. The escrow account is attached to your mortgage payment, so it’s all rolled into one. If you escrow your expenses – typically your homeowner’s insurance and your property taxes – it means that they add those monthly payments to your mortgage payment, and you pay it all at once. There are some upsides and downsides to escrowing your monthly mortgage payment, and you should discuss them with your lending officer or mortgage broker.
12) Homeowner’s Insurance
Homeowners insurance is a monthly expense, much like your auto insurance, and mortgage lenders require it. First time home buyers probably haven’t paid it before, but you probably understand what it does and why it’s necessary. It’s a significant expense over the course of a year, so it’s a good idea to shop around for it. If you bundle it with your auto insurance, you can often get a significant discount.
- Home insurance won’t cover all damage to your house, but it typically covers:
- Your primary dwelling and any outbuildings on your lot
- Liability for personal or medical issues
- Fire and/or smoke damage
- Damaging weather such as storms, lightning and hail
- Theft and vandalism
- Falling trees
- It typically won’t cover:
- Flooding or earthquakes
- Pest damage (termites)
- Jewelry or artwork
- Any damage caused by neglect or normal wear and tear.
- In some of these cases, you can buy extra coverage that will protect your home from specific damage.
13) Property Taxes
If you’ve been renting, you have probably paid property taxes, but they were rolled up into your rent payment, so you didn’t notice it. You will notice these property taxes, and they will take a monthly bite out of your homeowner’s budget. You will get a document every year from your county government telling you what your taxes will be for the upcoming year. This is a letter you should sit down for. As we mentioned, you can sort of hide them in your escrow payment. In some states, you can file for a property taxes refund, which is a lot like your April 15 tax refund, if you homestead your house.
- If you are wondering what your property taxes pay for, here’s a partial list:
- Public schools
- Law enforcement
- Roads
- Road maintenance
- Fire departments
- Libraries
- Parks
- Social Services
14) Utility Costs, From Water to Wifi
Again, if you’re looking at first time home ownership, many of these monthly bills may have been wrapped up in your rent check. Now you will be paying separately for water, sewer, electricity, trash collection and natural gas (depending on how you heat). Those were considered the old school necessities of keeping your house running. The new necessities in your new home budget may include your cable bill or your internet service – or both. As you are coming up with your new monthly budget, add these to the monthly house expenses column.
15) Homeowners Association Fees
Buying a condominium or townhouse presents its own advantages in terms of maintenance, but there are usually homeowners association (HOA) fees that you will need to pay. Make sure you are clear about what these are before you move in, because some of these fees can be very high.
Fun Homeowner Budget Items
Some new house expenses happen every month, but some of the more fun expenses are just one-offs that you need to save for.
16) New Appliances
The difference between needing new appliances and wanting new appliances is significant. If you must get new appliances, it’s often because something broke or one of the machines is just too old. You should know about this up front, after the inspection, and before you close on the house. There are always surprises, but you should be somewhat informed about the lifespan of the appliances in your new home.
If your budget allows for upgrading the appliances in your house, that can be fun. If new appliances are on your agenda, but not affordable when you move in, build some savings into your discretionary spending to upgrade in the future.
17) New Furniture and Décor
Another fun expense can be furniture for the new house. A new house gives you the opportunity to decorate and furnish your new life the way you want to. Maybe that’s as simple as a new couch, a new rug or a new bed. This might be an opportunity to also leave behind some of the old furnishings that are way past their due date. As with appliances, you might want to put some savings into your monthly budget for future upgrades of your furniture.
18) Planned Renovations
Jumping into renovations at the same time you are moving into your house is not for the faint of heart. In life, some things are messy, and some things are expensive – renovations are both. If you are moving in at the same time that renovations are happening, it can disrupt your life a lot. If you can do the renovations before move-in day, that’s ideal.
The expense of a renovation project can be much higher than either appliances or furniture, so budget accordingly. If you choose to do it yourself, it will likely be cheaper but will probably take more time.
19) Fixes
Some renovations aren’t fun or voluntary: they are fixes you need to make to the house to make it livable. These are functional, structural things like wiring, plumbing, roofing, HVAC systems, high radon levels, etc. that you must improve or fix before you can move in. Again, the home inspector should have found these and reported them to you. During negotiations with the seller, with the help of your real estate agent, you should have worked out how to pay for these fixes.
- The home repairs you can’t anticipate will probably be somewhat urgent and may come out of your checking or savings account (or a credit card). It’s hard to budget for them, unless you have an emergency fund specifically set up. New homeowners with the ability to do so should consider setting aside some money each month into a fund specifically for any unforeseen home expenses that may come up.
- You will also need to maintain the property by performing regular maintenance tasks, such as cleaning gutters, replacing filters, and inspecting the roof and foundation for damage. This is where your budget for unexpected repairs may come into play.
20) Pre-Cleaning
One thing you may want to do before you move in is pre-clean (if you have the time). A lot of first-time home buyers want to start their new home with a clean slate, and that means cleaning the house before you move in. If you need to move in right away, you will need to estimate how much cleaning you will do versus how much time you have to do it. If, for example, you have a whole day of access to the home before the moving starts, that might be a great time to do a very deep clean, sanitizing every surface, mopping, dusting and carpet shampooing.
21) Change the Locks
One recommended maintenance item in a new home, though not obvious, is to change the locks. You never know how many people have a key to your new house, and the list grows exponentially when you have multiple previous owners. The question of whether to replace all the locks or simply rekey them is a good one. If the hardware on the locks is rather old, replacement might be a good idea. Rekeying is, however, less expensive. Either way, you’re probably going to need a locksmith to do it properly.
- You might also want to change the code on your garage door opener and make sure you locate all the remotes for the garage.
22) Check and replace the HVAC Filters
Conventional wisdom says that HVAC system air filters should be replaced every 30-60 days. We thought that was too often, but then we saw what Bob Villa said on the subject, and that settled it for us.
- Bob said to change the filters for your furnace and HVAC systems every 90 days. He cites three reasons for this:
- Clean filters save on energy costs.
- Better air quality for the interior of your home
- Reduce wear and tear on the furnace.
- Since we are talking about vents, don’t forget to check your lint trap on your dryer often. Every year, there are 3,000 house fires caused by dryers.
23) Check the Refrigerator Coils
Now that you are officially a homeowner, the next thing you need is food. On the back of the refrigerator there are coils that are typically somewhere between very dirty and absolutely filthy. Fortunately, there is a brush that is specifically designed to clean fridge coils. Just like the HVAC filters, keeping your coils clean on a regular basis will help your fridge run better, last longer and be more energy efficient.
24) Smoke and Carbon Monoxide Detectors
Another non-optional home maintenance tip for new homeowners is to test and/or replace the smoke detectors and the carbon monoxide detectors. You could, of course, just check the batteries, but that won’t tell you how much life is left in the battery. You don’t want it to start the smoke alarm beeping in the middle of the night while you run through the house with a broomstick and barking dog. The best way to do it is by replacing them right up front. Then you can have them on your schedule rather than their own. You can then change them every 6 months, as recommended, when we change the clocks in the winter and spring.
- If you have fire extinguishers at your new home, this is a great time to check them to make sure they are charged and in good shape. If you don’t have them, plan to get some.
25) Main Water Shut-Off Valve and Circuit Breaker Box
You should do this early and get it out of the way. If the power goes out or water pipes begin bursting, you will want to do something about it quickly and confidently. Also, these things tend to happen in the middle of the night, so you will be dazed and unable to focus. Familiarizing yourself with the exact location can minimize the disruption and destruction. Finally, if you heat your home with propane or natural gas, learn where that shutoff valve is.
26) Drain the Hot Water Heater
This fits under the heading of routine, once-a-year maintenance, but it’s a good time to do it once you are moved in. Water heaters tend to build up sediment in the base of the unit, and that can reduce the efficiency of your heater. Worse, it can affect the taste of the water coming out of your faucets, especially if you have high iron content in the water in your area. This is usually a matter of locating the spigot at the bottom of the water heater and attaching a hose to it. When you open the spigot, make sure someone is holding the other end of the hose close to a drain. The water can come out forcefully and spray all over if the free end isn’t secured. Trust us on this one.
First time homeownership is a significant investment that requires careful preparation, planning, and ongoing work. By taking the necessary steps to prepare for home ownership, navigating the buying process, and maintaining your home and budget, you make the most of living in your new home.
May 10, 2023 / in Buying a House / Bob Filipczak
Last Updated on May 10, 2023 by Luke Feldbrugge
Living In San Antonio 