Financial Tips for First-Time Homebuyers

The Essential House-Hunting Guide for First-Time Homebuyers, Part One: Start by Reviewing Your Financial Situation

If you’re at the beginning of the homebuying process, we know this is an extremely exciting time in your life. However, we also know that the homebuying process might be causing you to feel overwhelmed, stressed, and confused because there are so many things you need to do to find the right house or condo. To help you conquer the homebuying process, Gilbert has gathered advice from several local professionals, including financial planners, real estate agents, and mortgage brokers. We’ve put their tips and insights into a series of blog posts that will walk you through four essential steps for a successful house-hunting outcome. Our team hopes that having this information at your fingertips throughout the homebuying process will make it a lot simpler and less anxiety-producing.

Part One: Review Your Financial Situation with 10 Important Questions and Tips from a Financial Professional

If you dive into the homebuying process without doing some serious financial planning work up front, you could end up wasting a lot of your time, effort, and money. The following questions are ones that our experts suggest you use to carefully examine your current financial situation. How you answer them can help you determine if you’re ready to invest in a house or condo today, or if you might need a little more time to get your finances in better shape.

  1. What is your net (after taxes) monthly/annual income and how reliable is it?

    Expert Tip: Before you can identify how much house or condo you can afford, it’s critical that you understand what resources are available to you from an earnings perspective. In addition, you should evaluate how steady your income is. For example, an income that is fully or partially commission-based is typically associated with far more risk than a salaried, six-figure one. You’ll also want to consider the chances that your financial situation might change before you buy a home, whether due to a career move or other major life event.

  2. How much money do you have saved and in what financial vehicles?

    Expert Tip: Most people know that, at some point in their life, they will want to buy a house and will need to put some of their savings toward a down payment. However, after graduating college and getting their first job, many 20-somethings tend to put money in a 401(k) or other retirement savings account. While saving money is a phenomenal habit to get into, you may be putting your money in the wrong place for this stage of your life. Instead of socking away money in a retirement account that does not allow withdrawals for a down payment on a home—at least not without a sizable penalty—you might want to put funds for a future house or condo into an easily accessible, high-interest savings account.

  3. What is your debt-to-income ratio?

    Expert Tip: After evaluating your income stream, you will want to analyze your debt, including rent, student loans, credit card balances, monthly car payments, etc. Then, calculate your debt-to-income ratio by dividing your total monthly debt by your monthly income. Home mortgage lenders look favorably on someone whose debt-to-income (gross) ratio is under 40%. If your debt outweighs your income, it might be a good time to consult with a credit coach, who can give you advice on how to consolidate your debts, free up cash for a down payment, and think “big picture” about your finances for the future.

  4. Sample Debt-to-Income Ratio Calculation

    $2,500 in monthly debt / $7,000 gross monthly income = debt-to-income ratio of 36%

  5. Are you buying a home with someone else?

    Expert Tip: If yes, then your co-buyer’s financial situation should be combined with yours to get an accurate financial snapshot. Also, if this co-buyer is not someone you are planning to be married to at the time that you make this large purchase, it would be wise to create a cohabitational agreement. In case the relationship does not work out, this contract defines what should happen to your home and other valuable assets that have been purchased jointly.

  6. How much of a mortgage payment can you afford?

    Expert Tip: The general rule of thumb is that your annual mortgage expenditure should not exceed 15% of your annual income (or combined annual income, if you’re buying with someone else). If you’re purchasing in a community that has a monthly association fee, you may want to factor this into your monthly mortgage expense, as well as the estimated costs of homeowners insurance, utilities, and property taxes.

  7. Sample Mortgage Calculation For $100K Annual Income

    Income of $100,000/year x 15% = $15,000/year in mortgage payments ($1,250/month)

  8. Will your lifestyle be impacted by these monthly payments?

    Expert Tip: After calculating your monthly/annual mortgage payment, it’s a good idea to consider how this expenditure might impact your favorite activities. If you enjoy dining out at higher-end restaurants, traveling regularly, weekly shopping sprees, or an expensive hobby like golf or wine collecting, you might have to make a choice between investing in a home, keeping up your current lifestyle, or perhaps finding a happy medium.

  9. What is the average price for a home in the areas you are interested in?

    Expert Tip: Now that you have your ideal mortgage payment amount, think about how realistic it is. If you are looking at real estate in a high-priced neighborhood in Massachusetts, then you might have to carve out more than you’ve budgeted for a mortgage. This is easier said than done, though. Any extra mortgage expense must come from somewhere—whether it’s less money that you put aside in your savings account or more money that you have to borrow for other pricey items, like a car.

  10. How much of your savings will go to a down payment?

    Expert Tip: To avoid paying private mortgage insurance (PMI), you will have to put down at least 20% on your dream house/condo. With the median single-family home value in Massachusetts topping $500,000 in 2022, that would mean you would need at least $100,000 saved up for a down payment.

    Sample Down Payment Calculation on $500K Home

    $500,000 home x 20% = $100,000 down payment

    If you don’t care about adding PMI expense to your mortgage payments, then you may want to research other available loans that have a lower down-payment requirement, like an FHA loan. However, it’s important to remember that the less you put down, the higher your mortgage payment will be, leaving you with less cash for paying bills and other debts, as well as for putting away in your savings account or spending on hobbies and entertainment.

  11. What additional funds do you have available to pay for a variety of out-of-pocket costs related to buying a home?

    Expert Tip: While the mortgage and down payment are the most crucial financial pieces to figure out, it’s important not to overlook the other fees that typically pop up throughout the homebuying process. From home appraisal and inspection costs to loan origination fees and closing costs, like attorney fees, settlement fees, title insurance, and recording fees, there are lots of expenses that often take first-time homebuyers by surprise. For this reason, it’s also critical to evaluate if you have sufficient cash available to cover these and other one-time expenses, like moving all your things into your new home.

  12. Is it time to get help from a financial coach?

    Expert Tip: With so much to think about, you may want to enlist the assistance of a financial coach—someone who can be trusted to give you unbiased advice. Whoever it is should be a disinterested third party who gets zero benefit from your buying a new home. They should also be able to help you think through what home purchase will fit into your overall financial plan and show you how all the important decisions you are making tie together in a cohesive and comprehensive way. Where is the best place to find this person? Asking friends and relatives for a referral is a great first step. Once you’ve identified a few people that you’d like to talk to further, set up a meeting to get to know them.

Answering these 10 questions and taking the time and effort to get your financials in order at the very beginning of your house-hunting journey should make the search for the right house or condo an easier and more successful venture.

In Part II of this series for first-time homebuyers, we will help you to identify the key characteristics you want and need in a home. Make sure to follow Gilbert on Facebook, Instagram, and LinkedIn, so you can get alerts about this and other upcoming blogs that might interest you.

Also, when you start to put together your team of experts to assist you, we hope you’ll contact Gilbert for help with all your home or condo insurance needs.

A special thank you to our colleague Ryan Wagner, financial representative with Robert Fine & Associates, for providing his input. Please contact Ryan for additional assistance with the financial aspects of buying your first home.