Financing your first home purchase is tricky for several reasons. For example, did you know you need to get pre-approved for a loan BEFORE you can start looking at homes with your agent? Without experience, it’s hard to understand how to finance your first home purchase in Colorado. First-time buyers are newbies regarding mortgage loan options, interest rates, credit scores, etc. This article will help you get the ball rolling and figure out how to pay for your dream home.
What Can you Afford to Pay Per Month?
Home buyers sometimes decide on a price point before they talk to a lender. They’ll say something like, “we are going to buy a home for $500,000,” and then head out to see open houses in that price range. This approach is fine if you have the cash in a bank account. However, most buyers can’t pay the asking price upfront. You’ll likely need a home mortgage loan to finance your purchase. In this case, it’s far more important to determine the amount you can afford to pay each month. As you think about your monthly budget, consider the following:
- Be careful when choosing a lender. Many lenders will approve you for more than you want to spend. Predatory lenders will likely approve you for a larger amount than you can afford. Just because you’ve been approved doesn’t mean you can afford the monthly payments. Start the conversation by telling your lender what figure you feel comfortable paying per month for your new home.
- Your mortgage payment isn’t your only consideration. Depending on the type of home you want, be prepared to pay HOA fees, special taxes, and insurance.
- Conservative advice is to spend about 30% of your monthly income on housing. Take some time to tally up your monthly household budget. Think about every expense, big and small. What exactly can you afford to spend on your home? Need a budgeting app? I love YNAB (You Need A Budget). You can get a free trial here.
How Much are You Willing to Spend Up Front?
Decide upfront how much cash you can put towards your home purchase. Will it include a gift from family? A loan from your 401k? Aside from your down payment, your first home purchase in Colorado will come with additional costs. You’ll need money for closing costs, agent fees, and cash for travel, moving costs, or any unexpected fees that may arise.
- Start with a dollar figure, not a percentage. You can work in percentages later when you have a sense of your purchase price. You may be able to spend a little less cash to hit one of the points that lenders like to see. For example, if you have around 10% to put down, then putting 12% down won’t drastically change your interest rate. In this case, you might want to save the extra 2% that you can put toward moving costs and closing fees.
- Closing costs run between 2.5% and 3% of your home price. Set aside some of your cash for closing costs. Your lender and real estate agent can help you estimate the cost.
- Don’t worry about putting 20% down. A traditional mindset says you must put 20% down to avoid mortgage insurance. Although this is still accurate in some cases, there are many great loan programs (especially for first-time home buyers) that can alleviate some premium mortgage insurance payments.
Food for Thought
- When deciding how much you can afford to pay toward your mortgage each month, consider the sizeable tax benefits of homeownership. Many buyers find they can afford to pay about 30% more in mortgage than their current rent.
- Every $10,000 change in your loan amount will only change your monthly payment by about $50-$80 per month. Don’t worry about saving for an additional $10,000 to put down if you can swing an extra $50-80 per month instead. There are many other ways to trim your monthly costs or augment your monthly income.
- Think of the loan summary your lender gives you as a rough draft until you find an option that suits your situation. The loan your friend gets is not the one you should necessarily pursue. These days, there are many loan options available to consider.
- Your credit score plays a big part in the type of loan you will be offered and its interest rate. The higher your score is, the lower your rate will be.
- A low credit score doesn’t automatically take you out of the game. No two situations are the same, and your lender will look at the overall picture of your finances. They consider your total overall debt, current income, and what you have for a down payment.
Making your first home purchase in Colorado takes a village. Decide on your budget and prioritize your expenses. After that, turn to a trusted real estate agent and friendly lender to figure out the finer details. I’m available any time to talk about how I can help you finance your home purchase! Schedule your discovery chat here, and I’ll tailor the next steps that are right for you!
Next week’s article will discuss how to put together your budget, optimal location, and personal criteria to find your perfect home. Stay tuned!
I'm Lauren Haug! I'm a teacher-turned-real estate agent, and I teach people how to build wealth through real estate in Northern Colorado.
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