Buying your First Home

A young couple stopped me at church the other day and asked about buying a home, their first home.  What a great time for them.  I remember well the first house Beth and I bought.  It was an exciting time.  It was adventurous.  It made us feel grown up at 25 years of age.  I recognized that same look of excitement and pride on their faces.

After a time of congratulations and sharing in their joy, we started discussing some key points in the decision process.  What debt they already have?  School notes, vehicles, or credit cards?  How long did they plan on staying in the home?   What upgrades or improvements would be required after purchasing the home?   What might be a great initial price for a home could cost a good deal more in the first year or two because of the hidden maintenance/upgrade  issues.

Then we got down to basics and just what really they needed to be able to show a bank.

1. What is the home value and what is their proposed down-payment? Lenders want the buyers to be invested in the property too.  The mortgage industry has drastically changed their requirements since the 2008 meltdown.  A down payment of 20% is the new norm and should be considered a requirement.   Obviously, a lower home price means less cash needed on-hand for the down payment.
2. What is their credit score? Young people may have not had a long credit history so this score may not be “excellent” at this point of their financial lives.  Knowing what their score is before sitting down with the banker is a good idea.  Free credit reports are available and apps like CreditKarma® can give an instant read on credit worthiness.  Cash available and credit worthiness are key components that guide the amount of interest to be charged or if the mortgage will even be written.
3. What is your current financial snapshot? Two numbers to think of here:  the capacity to purchase involves payment and income histories and any assets accumulated; for young couples there may not be much history.  The anticipated monthly housing expenses should be below 28% of their gross monthly income, ideally closer to 25%.  Then the applicant’s total of monthly debt payments, including this new proposed mortgage, is divided by gross monthly income and gives the debt-to-income ratio  If that debt ratio is higher than 36% then it will require a more stringent credit score which can be challenging for young home buyers.  Simply translated, it is  imperative to keep debt levels low as you start this journey.

I enjoyed the opportunity to see this young couple starting their lives together and headed towards this first big purchase.  I remember my bride and I walking through our empty first home just after completing the purchase and the hopes, dreams, and possibilities that lay before us.  With forethought and planning it can be a place where you and your spouse turn a house into your home and begin building memories together.

Tim Eichhorn is a Senior Financial Advisor with Rather & Kiitrell.  He is available at [email protected]