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 So you're a first time home buyer looking for some advice. The fact that you're looking around for home buying advice is a good sign. That means you already know how important this decision is going to be. After all, you only buy a home for the first time once and buying a home is a big investment.
Buying a Home for the First Time
This is just the start of a four part series that will walk you through the process of buying a home for the very first time. In this series we're going to cover:
- How to figure out what's an affordable mortgage
- Things you should consider when choosing your new home's location
- Working effectively with real estate agents
- Evaluating a home's potential value
When you buy a home you've got a lot at stake. In fact, it is very likely that the purchase of your first home will be the single largest purchase you have ever made. There's also a very good chance that you are going to stay in that home for quite some time.
So let's step back and start taking a look at money end of things - how much you can afford. First we're going to talk in generalities and give you a pretty simple rule of thumb to use. We'll also introduce you to our online mortgage calculators so you can run through some numbers yourself - without any pressure.
Affordable Homes and Mortgages
The first thing you need to figure out is how much you can afford. There are lots of websites that claim to have simple formulas for figuring out how large a mortgage you can afford. Well that's only half the story. In most parts of the country you will need to pay real estate taxes too.
In fact, in some parts of the United States real property taxes at can add up to a pretty hefty sum just by itself. Here is a quick calculation you can do yourself so you won't be too disappointed when you're told you cannot afford a home you thought you could afford because of an online test.
Visiting a Real Estate Office
Visit a local real estate agent's office and just tell them you would like to see some local listings. You don't need help right now, so you will take a business card to make the agent happy. Don't give out your telephone number unless you want to get pressured early in the game. Look at a couple of listings and get a range of home values, write down the home values and the real estate taxes too. Write down about 10 examples if you can.
Figuring Out What You Can Afford
The next step is to figure out how much home you can really afford. A simple rule is that the total of all your monthly loans and payments cannot be higher than about 29% of your gross income - that's the money in your paycheck before income taxes are taken out.
Take your annual salary and multiply it by 0.29. Now subtract from that number the real estate taxes you think you might be paying based on the information you gathered at the real estate office. Then divide that number by 12 months. Take that number and subtract all of your monthly loans - car loans, and credit cards for example. The number that is left over is what you can use to pay your mortgage. Take that number and divide it by 6. The value you now have is the mortgage you should be able to afford - stated in thousands of dollars. Lost yet? Let's work through an example.
Example Calculation
Let's say your household income is $70,000 and you have a car loan that costs you $250 / month. You visit a real estate agent and think your real estate taxes are going to run you around $3,000 / year. Following the instructions above:
- $70,000 x 0.29 = $20,300 - this equals your maximum annual payment towards all loans, including home loans
- $20,300 - $3,000 = $17,300 - this adjusts your annual payment for real estate taxes
- $17,300 / 12 = $1,441.66 - dividing by twelve calculates the maximum monthly payment you can afford
- $1,441.66 - $250 = $1,191.66 - adjusts for the car loan we're using in this example
- $1,191.66 / 6 = $198.6 or $198,600 - a simple rule of thumb to figure out the size of the mortgage you can afford
So in our example, this person could afford to get a mortgage of around $200,000 while still paying for real estate taxes and a car loan.
Mortgage Calculators
Admittedly, some people might find that formula a bit intimidating. Thankfully, we've introduced a number of online mortgage calculators that were built to cover just about everyone's needs - especially the first time home buyer.
In fact, our maximum monthly mortgage calculator is tailor-made to the first time buyer and comes complete with instructions and even explains how to interpret the calculator's results. If you've already been shopping around for mortgages, our mortgage comparison calculator helps you figure out which loan might be the best deal in your situation.
This is a good place to stop for now. In the next article in this series, we will talk about "location, location, location" another important feature of a home or house that the first time buyer needs to think about.
About the Author - First Time Home Buyer - Affordable Homes
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