Buying a home is an important decision and it's a difficult one too; especially for first-time home buyers. A new home is a big investment, and the choice is oftentimes one that lasts for years.
Buying a Home for the First Time
This is the first of a four-part series that walks through the process of buying a home for the very first time. In this series we're going to cover:
How to figure out what's an affordable mortgage
Things to consider when choosing a home's location
Working effectively with real estate agents
Evaluating a home's potential value
There is a lot of risk when buying a home. In fact, someone's first home will usually be the single largest purchase decision they've ever made. There's also a very good chance they're going to be living in that home for quite some time.
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So let's step back, and start by taking a look at the money end of things: How much can a buyer afford? At first we're going to talk in generalities, then provide some simple rules of thumb anyone can use. We'll also introduce our online mortgage calculators, which allow users to run through some numbers; without any pressure.
Affordable Homes and Mortgages
There are many websites that claim to have simple formulas for figuring out how large a mortgage someone can afford. Well that's only half the story. In most parts of the country, homeowners will need to pay real estate taxes too.
In fact, in some parts of the United States, real estate property taxes can add significantly to the owner's monthly mortgage payments. Plus, average home prices among states may vary significantly.
Real Estate Offices
Visit a local real estate office and ask the agent to see some local listings. Don't get too involved with the agent at this point; take a business card to make them happy. Don't give out a telephone number or there will be a lot of pressure very early in this part of the research. Look at a couple of listings, and get a good feel for the range of home values. Write down the home values and the corresponding real estate taxes too; about ten examples are needed.
Determining What's Affordable
A simple rule of thumb is the total of all monthly loans and payments cannot be higher than about 29% of the household's gross income. That's the money in a paycheck before income taxes are taken out.
To understand how much money they need to buy a house, buyers should take their annual salary and multiply it by 0.29. Now subtract from that number an estimate of the home's property taxes based on the information gathered at the real estate office. Then divide that number by 12 months. Take the result and subtract all monthly loans: credit card payments, student and car loans. The number that is left over is what can be used to pay a mortgage. Finally, take that number and divide it by 6. That value is the mortgage this buyer can afford, stated in thousands of dollars. Lost yet? Let's work through an example.
Example Calculation
Let's say Rob's household income is $70,000 and he has a car loan that costs $250 per month. He visits a real estate office and thinks property taxes are going to run around $3,000 per year. Following the instructions above:
$70,000 x 0.29 = $20,300; this equals his maximum annual payment towards real estate taxes and all loans, including a mortgage
$20,300 - $3,000 = $17,300; this adjusts his annual payment for real estate taxes
$17,300 / 12 = $1,441.66; dividing by twelve calculates the maximum monthly payment he can afford
$1,441.66 - $250 = $1,191.66; adjusts for the car loan used in this example
$1,191.66 / 6 = $198.6 or $198,600; a simple rule of thumb to figure out the size of the mortgage Rob can afford
In the above example, Rob could afford a mortgage of around $200,000, while still paying for real estate taxes and a car loan.
Mortgage Calculators
Admittedly, some people might find the above formula a bit intimidating. Thankfully, we've introduced a number of online mortgage calculators that were built to cover just about everyone's needs; especially the first time home buyer.
In fact, our maximum monthly mortgage calculator is tailor-made to the first time buyer, and comes complete with instructions that explain how to interpret the calculator's results. Anyone that's already been shopping around should look at our mortgage comparison calculator too.
This is a good place to stop. In the next article in this series, we will talk about "location, location, location" another important feature of a home.
About the Author - First Time Home Buyer: Affordable Homes
