Buying a home can evoke a wide range of emotions, both positive and negative. I can attest to this firsthand, as my fiancée and I just purchased our first home together in April. During the homebuying process, we felt excitement, anticipation, anxiety, disappointment, and relief to name a few. In this blog, I will discuss lessons that I learned and share some things to think about when you decide to purchase a home.

Lenders May Not Have Your Best Interest in Mind

Although it might be a hassle, I recommend speaking to at least three mortgage lenders to ensure you are getting the best loan terms available to you. You may consider using your preferred bank’s loan officer, an online mortgage lender, and a mortgage broker (who can shop your loan against many different companies). Creating a folder on your computer with the files commonly requested by lenders can save you time during this step. A few examples of things they may ask for are tax returns, bank account statements, W2s, investment account statements, and outstanding debt information to name a few.

The price of the home to buy is another consideration. The lender likely wants you to purchase the most expensive house for which you qualify. If you have good credit, you could be offered a mortgage with up to a 50% Debt-to-Income (DTI) ratio. This means that on a $150,000 household income before taxes, you could be qualified for a mortgage payment of $6,250 if you do not have any other debt. Assuming 1% property taxes, $5,000 in homeowner’s insurance, and 6.5% interest rate, this would equate to an $815,000 mortgage. Although it varies based on your personal situation, we recommend keeping your mortgage payment to a maximum of 28% of your monthly before tax household income and your total debt payments lower than 36%.

Your Budget Isn’t Just the Mortgage Payment

There are many costs associated with owning a home besides the mortgage payment. The mortgage payment is the minimum you will pay each month. Maintenance costs can be substantial, especially in older homes. At AFG, we typically budget 3% to 5% of the home’s value for yearly maintenance and repairs. My fiancée and I moved from a one-bedroom apartment to a three-bedroom house and found we needed more furniture to fit the new space. We also had to set money aside in our budget for lawn equipment and a few other homeowner necessities.

It is also important to evaluate home insurance and property tax costs when considering purchasing a home. If your payment is in escrow, these items will be included in your monthly mortgage payment. I was surprised at the cost of home insurance. After shopping around at multiple providers, the premium was about 20% higher than I had originally budgeted. Property taxes are a consideration as well. Depending on the area, you may see large differences in the amount. If these expenses are not in escrow, make sure to set aside funds for these expenses in your Savings-to-Spend account.

Your Emergency Fund is More Important Than Ever

A down payment and closing costs can be substantial. It is crucial that even after closing, you still have an emergency fund in place. In my own experience, it seems like at least one large, unexpected expense occurs shortly after closing. For us, it was an HVAC issue that left us without air conditioning for about a week and required a large repair. If you plan to do upgrades or repairs to the home, that should be accounted for separately from the rest of your emergency fund. For funding ongoing maintenance and repairs, AFG recommends using the Savings-to-Spend system of regularly funding a savings account to pay for future maintenance.

A tactic we used was negotiating the closing costs that the seller paid. Some sellers can be anchored to a certain sale price for their home – if they are unwilling to budge from that, you may consider asking them to pay a portion of your closing costs. This helps maintain the emergency fund by requiring less out of pocket money at the closing table.

Try Not to Listen to Outside Influences 

People will have opinions about you buying a house. They may prefer a new build when you prefer an older home. They might think the home price or interest rate is too high. The right time for you to buy is a personal choice. If you believe that you will want to be in the area you are purchasing and the home will fit your needs for at least 5 to 7 years, it might make sense to consider purchasing. You should also consider your career outlook. If you are thinking about going part time at work in the next year or two, you should be shopping with that income in mind. You might prefer proximity to a certain school or neighborhood or even being close to loved ones. Buying a home has many non-financial aspects that must be considered. It is important to keep your values in mind.

Wrapping It All Up

It is important to realize that the home buying process can be very emotional for everyone involved. As a seller, you might be moving from the home where you raised your children. For a buyer, you could be envisioning what your life would look like in this new place. Being aware of these emotions can enable you to make the best decision for your future. 

Having a team around you can make all the difference. A good realtor, insurance broker, mortgage lender, and home inspector can make things much easier for you. At AFG, we are happy to help you think about the home buying process and all the financial and non-financial decisions that come with it. Please reach out anytime for our assistance.

Jake Spradlin, CFP®

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The Arkansas Financial Group, Inc. is a Fee-Only Financial Planning Firm located in Little Rock, AR serving clients in Arkansas and throughout the country.

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