Preparing to Buy Your First House

Before you can start looking for your dream home, you’ve got to do some legwork so you’re in a good position to buy. Let’s start right here.

1. Pay off all debt and build an emergency fund.

Okay, when you asked for first-time home-buyer tips, you probably didn’t expect this one. But it is hands down the most important.

Owning a home is much more expensive than renting, even if your monthly house payment will be less than your current rent. When you’re a homeowner, you’re responsible for everything. All the maintenance and mishaps add up fast!

Before you even think about buying your first home, get debt-free and save an emergency fundof three to six months of expenses. Then, your money won’t be tied up in monthly payments, and you’ll have cash to cover unexpected costs.

Avoiding Debt as a First-Time Home Buyer

Once you’re debt-free, I want you to stay that way. (Minus the mortgage. More on that in a minute.) So even though you’re excited about decorating, it can wait.  

I’m a spender, so I know that’s easier said than done. But it’s okay to let a room sit empty until you can afford to furnish it. Stick with the good money habits you learned while getting out of debt. Your future self will thank you.

2. Use the 25% rule to see how much house you can afford.

Before house hunting, determine how much house you can afford. Your monthly costs—including the mortgage, escrow, and homeowners association (HOA) fees—should be 25% or less of your monthly take-home pay.

For example, if you bring home $6,600 a month, your maximum house payment is $1,650. Now imagine you get a 15-year fixed-rate mortgage at 4% interest. You pay 1.14% for property tax and $1,200 per year for homeowners insurance. You can afford:

  • $194,000 home with 10% down ($19,400)
  • $225,000 home with 20% down ($45,000)
  • $253,000 home with 30% down ($75,900)

3. Save a 10–20% down payment.

The best down payment is an all-cash offer. Nearly 1 in 4 buyers pay cash for their houses. But if that isn’t reasonable for your first house, then your goal is to save 10-20% for a down payment.

A 10% down payment helps keep your monthly mortgage low. But 20% is even better because your lender won’t make you buy Private Mortgage Insurance. PMI can really blow your budget, so try to avoid this nonsense.

4. Save for closing costs.

Closing costs are typically around 2–7% of your home’s purchase price. Here’s an example:

$300,000 home x 3% = $9,000 closing costs

That’s a big chunk of change—on top of your down payment—but I promise you can do it! Tackle these savings with intensity. You can even put retirement savings on hold for a short time to save for a home.

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