In my line of work, I see them all the time. Every day even. As my cadre of 40 agents traipse in doe-eyed homebuyers — all who want to buy into a piece of the American Dream — I watch as some of those dreams get crushed under the steel-toed boot of reality, all because these first timers don’t understand the importance of budgeting for their down payment and closing costs. There is no easy path to home buying, and being prepared for the costs associated with what will (probably) be your largest investment, is no small task.
Step 1: Analyze Your Financial Situation
Homebuyers need to paint a clear picture of their current financial situation, by asking (and honestly answering) a few key questions:
Do you have debt?
What is your debt-to-income ratio?
Do you have excess cash flow each month (i.e. disposable income)?
I advise clients to look at what they are spending each month on rent. Then, I tell them to add projections for utilities, homeowner’s dues, taxes, insurance, repair and maintenance costs. This will help establish your financial comfort zone.
Step 2: Get Pre-Qualified for a Mortgage
No matter what manner of rosy picture distant relatives or close friends paint for today’s buyer, the bottom line is that sellers today only work with pre-qualified (or pre-approved) buyers. Why? Because no seller wants to tie up the sale of their home waiting for a potential buyer to get his or her act together.
Homebuyers need to find a qualified lender and turn in their required documentation before ever stepping foot across the threshold of any property up for sale.
Expert tip: If you don’t know where to find a lender, ask a qualified real estate sales professional.
Step 3: Save for a Down Payment
Down payments range (depending on the loan) from nothing at all to as much as 20 percent. In my experience the average down payment is usually 3.5 percent to 5 percent of the sales price of the home. However, my advice to homebuyers has always been to have even more than that saved up. In addition to the down payment you will need to factor in at least another 4 percent for closing costs and pre-paid items. Sure, sometimes the seller will pitch in and help homebuyers with the closing costs, but buyers still need to be able to pay for a move, transferring (or establishing) of utilities, and have a cushion to soften the blow of any unforeseen costs. Don’t save up just enough, save more than enough.
I would steer my clients toward Mint.com as a budgeting tool and Smarty Pig for a savings account. Then, I would tell them to stash 20 percent of their paycheck each payday until they had at least 10 percent of their desired purchased price in the bank.
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