Buying a home is a dream many have. While there are expenses that don't come with renting, there's peace of mind that owning real estate brings.
This peace of mind, however, can be fleeting for those who get in over their heads when it comes to obtaining a mortgage and figuring out how much space they need to adequately provide for themselves relative to how much income is being earned.
When it comes to mortgages, first time home buyers would be wise to look into local lending programs.
First Time Home Buyer Programs
Some home buyers are very patient. They wait until they have a large down payment after years of saving and buy a home that is within their means. For buyers like this, obtaining a loan will not be an issue, but that does not mean that they will get the best rate.
Mortgage brokers typically make money by getting some up front and the rest after the deal is completed. For example, a broker may tell a buyer that the rate is 6.25%, but she can get him 5.75% if he will pay a discount point. One point is 1% of the loan, so a $150,000 loan would require an extra $1,500 at closing. While this rate is good, the bank is actually paying brokers based on a prime rate of 5%, and will reimburse the broker with another point and a half ($2,250) for getting them a favorable percentage rate, grossing her $3,750.
While this is a fair practice, it makes it difficult for first time home buyers. However, when one goes through a government program, the rate is set at an amount that is favorable to both sides (like the one above) but no extra closing costs are incurred upon the buyer.
Mortgage Payments Should not Exceed 25% of Income
Lenders will be glad to approve a person or couple for more money than is reasonable to put into a home. Legally, they can approve a loan to a person with no other debt for a monthly payment that is about half their income. If a person earns $3,000 a month he can be approved to have a payment of $1,500 despite the fact that after income, FICA, and Medicare taxes he'll only be left with about $2,100. After the utilities, gas, and auto insurance are paid, he might want to consider a second job to put food on the table.
For this reason, a person's house payment should not exceed 25% of his income, just as it wouldn't be allowed to for a rental contract. For more information read: Rules of Thumb for Home Buying.
While determining price, buyers need to consider just how much space they really need.
How Much Space is Needed in a new Home?
Some young couples get very excited about buying home, especially if they are making a good income. While it can prove to be a good investment as real estate does have a track record of doing well in growing areas, practicality should also be taken into account.
A family of three does not need a five bedroom home, but they may if they have aging parents and would like to have more children.
Having a large home has many costs some buyers do not consider, such as:
- Furniture
- Maintenance
- Utilities
When a couple moves from a two bed/one bath home to a five bed/two and a half bath home, the selling price is only the beginning. Furnishing the new bedrooms modestly is going to cost thousands of dollars. Also, this kind of home will likely have a nice dining room that will look rather empty without a large table needed to entertain in.
In addition to this, maintaining a home of this size includes carpets, painting, and replacing old, broken, and worn out hardware and fixtures. Toilet paper for three commodes, guest towels, and the extra labor required for cleaning cannot be overlooked either. Such a home may require weekly assistance from a cleaning person.
Also, a home of this size will need to be heated and cooled. For a small family, most rooms will be unused, but quite comfortable, and when the AC or heating unit needs to be replaced, one to fit the capacity of such a home can run much higher than a unit for a home half its size.
First time home buying can be very stressful even when a person or couple buys the ideal house. When mistakes are made that have a residual effect, the stress can mount, which is why how and how much one borrows, as well as how much home is purchased, is so important.
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