FIRST-TIME HOMEBUYERS: FINANCIALLY PREPARING TO BUY YOUR FIRST HOME

“Give me six hours to chop down a tree and I will spend the first four sharpening the axe.” ― Abraham Lincoln

Having made a thoughtful decision to buy a home (link to “Homebuyers: Finding The Right Time To Buy A Home”) and after calculating how much you can afford (link to “Homebuyers: Figuring Out How Much House You Can Afford”), it is time to sharpen your ax and prepare your personal finances. This foresight will ensure you can cover the upfront costs and obtain the most favorable terms on your mortgage loan.

Upfront Costs

  • A 20% down payment will lower your monthly payments and, in most cases, eliminate the need to carry private mortgage insurance.
  • Closing costs include a variety of expenses above the purchase price of your property, such as attorney fees, title search, title insurance, taxes, lender costs, and some upfront expenses such as homeowner’s insurance. The amount you’ll pay varies according to the size of your loan and tax laws in your area. Closing costs are average between 2% and 5% of the purchase price.
  • While moving costs are dependent on the amount of furniture, appliances, and other household items you currently own, average costs for local relocation within the Bay Area are below:
    • 1-bedroom home: $200-$500, 3-5 hours of labor
    • 2-bedroom home: $375-$750, 5-6 hours of labor
    • 3-bedroom home: $800-$1,500, 7-10 hours of labor
    • 4-bedroom home (and up): $1,000-$2,000, 10+ hours of labor

The hourly cost of labor varies widely among moving companies, so it is helpful to get a few estimates from different companies for a more accurate idea of expected costs.

Because Julie has collaborated with many different moving companies when assisting her clients with relocations, she has several prospects she can recommend to you.

  • Minor repairs and additional furnishings should also be considered. Cosmetic issues and normal wear-and-tear are not usually the responsibility of the seller, so keep some money aside for minor repairs. If you’re moving to a larger space, make a list and price out any additional furnishings.    

Most Favorable Loan Terms

  • Your credit score is the first thing a mortgage lender will check to determine your eligibility. For a conventional mortgage loan, your FICO score should not be lower than 620. Before applying for a loan, check your credit score and, if needed, take steps to improve it.
  • The 28/36 rule is generally used by lenders when considering a conventional loan. The 28/36 rule states that a household should spend no more than 28% of its gross monthly income on total housing costs, and no more than 36% on all debt which includes total housing costs plus other recurring debt payments. Taking steps to reduce the amount of these other recurring debt payments—car loans, student loans, and credit cards—will bring you closer to meeting the 28/36 rule. Before applying for a loan, keep these tips in mind:
    • Lower your monthly student loan payments by: (a) extending your repayment plan, (b) opting for a graduated payment plan, (c) enrolling in an income-driven repayment plan, (d) consolidating your student loans, or (e) refinancing at a lower interest rate (for details, click here and here). If your student loans are being paid by a third party (such as your parents), lenders will not consider them when calculating your debt-to-income (DTI) ratio.
    • Banks will exclude your car loan from your recurring debt payments when only nine months (or less) are left to pay it off.
    • Whenever possible, pay off your credit card debt. If you don’t have the cash at hand, consider borrowing from your 401K plan. While lenders won’t consider this new loan as part of your DTI, it is good practice to disclose it during negotiations.
    • Avoid taking on more debt until after you close on your loan.

Discover more about your debt-to-income ratio here.

Julie and her team of experts are ready to help you sharpen your ax and prepare you to achieve your dream of homeownership. We look forward to helping you with your homebuying questions.

Please contact Julie at 650.799.8888 or Julie@JulieTsaiLaw.com to schedule a free consultation.