4 Important Financial Decisions to Make When Preparing to Buy Your First Home

Sunday, November 8, 2020, 6:00 AM | Leave Comment

Buying a house is one of the most significant financial decisions an individual or a family can make.

It’s the biggest financial outlay for most people. That’s why it’s important to make important financial decisions before signing on the dotted line.

  1. Pay Down Debt

    The majority of household income for most people comes from a paycheck. This means that there’s a limit to how much people have to spend. If you’re in this boat, you’ll want to pay down any debt that you have before you buy a new house. Every debt that you have takes up a chunk of your paycheck, and it will make it more difficult to keep up with your mortgage.

  2. Accumulate a Down Payment

    Conventional mortgages require a down payment. In many instances, the amount you’ll need is 20% of the purchase price. You’ll probably qualify for a mortgage if you have 5% or 10% available. The government offers FHA loans that require only 3.5% down, and the USDA and VA offer loans that require no down payment other than closing costs.

    There are a couple of reasons you’ll want to make the decision to save a down payment. First, a down payment of 20% will allow you to avoid mortgage insurance. This insurance protects the lender, not the borrower. Therefore, it provides no benefit for you other than allowing you to get into a house with a lower down payment. The second reason you’ll want a nice down payment is the instant equity you’ll have in the property. This will make it less likely that you’ll wind up underwater on your loan.

  3. Don’t Become House Poor

    When you apply for a mortgage, the bank will give you a maximum amount that you can borrow. Just because you can borrow an amount doesn’t mean that you should borrow that amount. Buying a house costs your borrowing limit is a great way to become house poor. This means that your house will take up most of your income and make it difficult to achieve other financial goals.

  4. Don’t Neglect Other Goals

    Even though you might want to buy your dream home, don’t let it derail your other financial goals. You should still maintain retirement savings while paying off your home. This will allow you to build wealth that’s not tied to your home. Your home is not very liquid. You’ll want to have money available for emergencies and retirement.

Buying a home can be a stressful process. That’s why it’s important to make these important decisions before you finalize your purchase. You’ll likely have more financial stability over the long run, and you’ll have a better chance at building up a nice level of wealth.

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