First Time Home Owner

Buying your first home is an exciting step. It can also be scary so you’ll want to do your homework.

Home ownership means taking on new responsibilities that take time. Have you looked at how you spend your free time today and considered how life will change after you own a home? You may be able to continue daily visits to the gym before work while cutting back on weekend hikes to once a month.

These changes in your lifestyle aren’t temporary. The lawn needs to be mowed, gutters need to be cleaned and your home’s trim needs touch up painting annually. If you’re looking at buying a fixer-upper, you’ll probably be spending much of your free time (nights and weekends) working on it for several years. You might want to try out this lifestyle by volunteering to help a friend first, because once you’ve bought your new house, you own it.

Owning a home will also impact your finances. Today your discretionary income goes to clothing, eating out and vacations. These are decisions you can change easily while many home owner expenses aren’t discretionary. If your refrigerator stops working tomorrow, you need to buy a new one … now. Once you own a home, having an emergency fund to cover 3 to 6 months of expenses becomes more important.

Too often new home owners stretch to buy homes they really can’t afford yet. Rather than saving for several years, they borrow money for the down payment from family members. They run up credit card charges to furnish the new home and after closing costs, there isn’t any money left in their emergency fund. As you put together your new home owner budget, here are recommended tips:

• Don’t burden yourself with hidden family loans to buy your home. If you don’t have enough, start saving more aggressively and wait until you’re ready.
• Don’t shift expenses to credit cards to squeeze through the closing. Start eliminating recurring expenses that offer less value than owning a home.
• Make sure your emergency fund is funded for 3 to 6 months, as you might need to make some repairs in the first 1 to 2 years following your purchase.
• Adjust your budget for higher utilities, higher insurance plus home maintenance which should be 1 to 2% of the purchase price of your home.
• Think through discretionary trade-offs, i.e. maybe you swap eating out for 2 years to fund a furniture allowance, and pay cash to save interest charges.

You’ll also want to review our tips on buying a home where we cover things like finding a realtor, credit scores, different types of financing and more. A concept you’ll want to get familiar with for your budgeting exercises are your front and back end ratios. Traditionally banks compute your housing costs, or “front end debt ratio” = mortgage principal and interest + taxes + insurance.

The FHA (Federal Housing Authority) requires this number to be lower than 31% while conventional loads allow up to 33% of your monthly income. To qualify for a mortgage, you must also meet the “back end debt ratio” = front end debt + all recurring debt like student loans, car payments, credit card payments, etc. Computed as a percent of your gross monthly income, the back-end for FHA loans is 43% and for conventional loans it’s 45%.

We’ve got lots of great information on buying a home. For first time home buyers, we recommend the following articles. Our goal is to help you have a successful experience buying your first home, and taking on the responsibilities of a homeowner.

• Are You Ready to be a Home Owner? -
  We look at the top 20 home owner responsibilities and help you estimate you much time you’ll spend on them, including those you’d rather hire someone to handle as not everyone likes mowing the lawn.
• Preparing Your Home Owner Budget -
  There’s less stress when you have a plan and a budget to achieve your goals. Here’s a simple budget worksheet to help you plan for all your new home owner expenses like condo association fees and homeowner insurance.
• Understanding How Much Home You Can Afford -
  You’ll save time and avoid disappointment by looking at homes you really can afford. By preparing your price range before you start looking, you’ll look in the right towns and find the house that’s right for you.
• Finalizing Your Top 3 Choices in Location -
  Location is key when buying, and later when you’re ready to sell. Schools, proximity to shopping and entertainment plus access to commuter routes all influence housing costs and the community you will one day call home.
• Setting Your Home Buying Priorities -
  When you buy a home you’re balancing home and lifestyle outside the home. If museums and the theater are important, you’ll want to look at smaller homes close to a city. For those who love sports and gardening, moving further out will satisfy those needs.

Have a great article idea or want to request more information about a specific topic? Be sure to submit your article request about other alternatives you’ve found so we can add that information to our Home Owner’s Library.