Many first-time homebuyers are eager to qualify for the highest home value they can get. That’s understandable when you think about checking off all the comforts on your homeowner’s wishlist. But if you think you can comfortably afford the home you qualify for, you might need to look a little closer at your individual finances, and think again.
Mortgage Pre-qualification is a ballpark estimate your lender makes based on basic financial information. The true picture might look a little different, so we are here to help prepare you to understand what that could look like.
The Renter’s Illusion
It’s pretty common for first-time homebuyers to assume that whatever they are comfortable paying in rent can easily become an equal mortgage payment. But there’s a lot on the line financially speaking that homeowners are responsible for, and renters aren’t. Not to mention that your mortgage is intended to be a longer commitment than a rental agreement. The costs can add up.
That’s not to say homeownership isn’t an amazing investment with major benefits, in the long run, the team here at EPM just wants to make sure you are making informed decisions about homeownership that ensure that investment pays off.
Here’s what you should know about how much home you can REALLY afford:
An Emergency Fund is a MUST
When you rent, the landlord is responsible for the repairs, replacements, and even many upgrades to make sure your house is safe, comfortable, and feels like home. When the pipes freeze, it’s on them. When the dishwasher, AC, or the plumbing goes out, they need to call the pros in to fix it. Need a new roof? It’s not on you, it’s on the landlord.
When you own, you ARE the landlord. ALL emergency fixes are on you. That includes not so imminent emergencies like when your blinds won’t open, your front door is fading and scratched, and your windows need better insulation. It’s ALL ON YOU, and you are going to want to make sure that you have funds on hand for when something goes wrong… because it’s not a matter of IF but WHEN.
Keep Your Good Credit in Great Shape
Your emergency fund should NOT BE A CREDIT CARD. If you put something on your card that you can pay off relatively quickly, that’s perfectly fine and even a healthy way to use credit. HOWEVER, if you are stretched so thin that you have no way to pay for incidentals than with credit that will take months or years to pay off, then you might be paying too much for your mortgage.
We have tips to get your credit in good shape before applying for a home loan, but it’s imperative for your financial future that you keep it that way. Don’t use credit to buy things you can’t afford, and don’t pay more for a mortgage if you’re going to have to rely more on credit.
Your Home is One of MANY New Expenses You’re Signing Up For
A lot of new homeowners think about how they want to decorate their new space. They plan on buying new furniture, appliances, accessories, and hardware. They may even have a budget for landscaping. However, it’s common to forget to factor in things that come along with the cost of their home like flood insurance, HOA fees, PMI (link), etc.
The Type of Mortgage Can Change the Cost over Time
For a Conventional Mortgage, you’ll typically be required to make a 20% downpayment. That’s a lot more money upfront. There are government-backed loans that offer a lower or no down payment. However, that means you are going to make higher payments each month and pay more over the length of your loan. If you’re paying on a variable rate mortgage, the interest rate (which is historically low right now) will inevitably go up.
It’s always a wise decision to go with reliable experts when making a major financial commitment like homeownership. Make sure you trust your team from realtor to lender and beyond. You’re in the driver’s seat, and should never feel pressured to make a decision you aren’t on board with. When you are ready to take the next steps, contact a team member at EPM to help guide you through the process and keep you informed of your options every step of the way.