Your first home checklist
Buying your first home may be the biggest financial step you've taken so far. It's important to be sure that you're not taking on more than you can carry comfortably. Here's how to assess your financial capabilities.
Here's how to assess your financial capabilities.
- Think about how much money you have available to make your down payment.
- Figure out how much you can reasonably pay each month for your mortgage, property taxes and homeowners insurance. (This number will normally be the size of the check you will have to write each month as your mortgage payment, and it will give you an idea of how large a loan you may be able to support. Keep in mind that many lenders expect your monthly payment to be less than some specific percentage limit, often 28% to 33% of your gross monthly income.).
How can you decide whether the home you're looking at is really within your budget? Here's a list of expenses that can be considered primary housing costs.
- Estimate what your mortgage principal and interest payments would be, remembering that for any given interest rate, a longer-term loan will cost you less each month but add up to more total cost in the long run.
- Look carefully at the real estate taxes for the property. In some areas, all real estate taxes go to the city or town. But in others, there may be separate taxes for the local government and the schools, as well as for regional agencies such as water supply or sewage districts.
- Homeowners insurance costs can vary widely. You may be able to use the home seller's current bill as an approximation for your budget.
- Add up all utilities you're likely to need — energy costs (natural or propane gas, electricity and oil), water and sewer, telephone, broadband Internet, and cable or satellite television.
- Condominiums and cooperatives generally assess monthly fees for common expenses. Some subdivisions have homeowners association dues for maintaining common resources. You'll need to account for these fees in your cost estimates.
You may also want to get a handle on the secondary costs related to your housing choice. If different homes have significantly different implications for your day-to-day costs, understanding these costs could make the difference between financial comfort and financial stress.
- Commuting costs can add up, especially for longer trips. At $3.50 a gallon, figure 10 cents to 20 cents a mile for fuel. For a new car with a $40,000 price tag, figure another 35 cents a mile for depreciation. Tolls could add a few dollars a day.
- Any home needs maintenance. Painting, roofing and masonry work may only be required every few years, but when necessary, these jobs may cost thousands of dollars. Many people find it prudent to budget for an annual savings program to build reserves for these expenses. Appliances and heating and cooling systems likewise require both periodic repairs and occasional replacements.
- Renovation is a much bigger effort than maintenance. If you think you'll really need an updated kitchen or a new bathroom, budget immediately for it or increase your mortgage amount enough to cover it.
- Some properties may have fees for optional recreational resources such as golf courses, health clubs or skiing. If you intend to use any optional resources, you should budget for them.
From the moment you get serious about a home and ending at the point where you can take possession, you will pass a number of steps that may demand significant cash outlays. Here are some of the major cash needs you'll have.
- In many markets, it is customary to provide a preliminary down payment when you make a written offer on a property. That means you may have to write a sizeable check on short notice. (This money would typically be returned if your offer is rejected but held in escrow if you proceed, and ultimately applied to your down payment at closing.)
- As part of the mortgage application process, mortgage companies often ask to see a checking or savings account balance in your name that's large enough to cover the expected down payment.
- Home inspectors, consulting engineers and architects may require payments when services are rendered, especially for multiple inspections and any pre-purchase testing of the home or ground, air or water around the property.
Many of the most annoying hiccups in home buying occur during the mortgage application process. You can smooth that process considerably by making sure that your financial documentation is all in order. Here's a guide to items you may need.
- Proof of your current income and income history for at least two full years (typically tax returns and withholding statements combined with pay stubs or wage statements).
- Checking account and credit card statements to show your spending patterns.
- Proof that you have the resources to make your down payment.
- Statements that show your other financial assets and your debts (excessive credit card debt may create mortgage difficulties).
- Copies of your current credit reports to assure yourself that there aren't any potential difficulties in the files. (If there are, be certain they are addressed before you apply for a mortgage.)
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The material was authored by a third party, DST Retirement Solutions, LLC, an SS&C company ("SS&C"), not affiliated with Merrill or any of its affiliates and is for information and educational purposes only. The opinions and views expressed do not necessarily reflect the opinions and views of Merrill or any of its affiliates. Any assumptions, opinions and estimates are as of the date of this material and are subject to change without notice. Past performance does not guarantee future results. The information contained in this material does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy. Before acting on any recommendation in this material, you should consider whether it is in your best interest based on your particular circumstances and, if necessary, seek professional advice.
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