Preparing to Buy a House – Part 1

by Scott Sery on March 21, 2012

House For SaleBuying a house is the biggest financial decision most people will make in their lifetime.  That is why it is very important to prepare for the purchase, and not rush into any decision.  By taking a little time to figure out how much house they can buy, saving for a down payment, look at first time buying schemes, know about mortgages and interest rates, understand one’s credit score and know what to expect; a person can take this huge financial decision, and make it simple.

The decision to buy a house should start at least a year before actually buying the house.  During this time a person should figure out just how much house they can buy.  This means analyzing the monthly budget to see how much can be earmarked for the house payment.  From there a mortgage calculator will help a person work backwards to figure out the amount of the loan based on the desired principal and interest payments.  For example: a 30 year loan for $200,000 at 4.5% interest will require $1,013 per month in principal and interest payments.  But this is not all that is required every month.  A quick search will reveal how much in taxes are owed each year on the property, and a phone call to an insurance agent will allow the future owner to know roughly what it will cost to insure a substantially similar house.  Including utilities, and a slush fund for repairs that will inevitably pop up, those who can afford $1,000 per month will not be able to afford a $200,000 house.  For married couples who have two incomes, it is best to rely on just one income to make the payments.  If it takes both, you are looking at too much house.

Once you have determined how much you can afford to pay each month, then you can start saving for a down payment.  A general rule of thumb is to put at least 20% down on the house.  The more you put down, the less you will pay each month in payments.  But the 20% mark is important because this is where the private mortgage insurance drops off.  PMI is required by lenders to protect them in the event the borrower defaults on his or her loan.  Even with outstanding credit, a borrower will pay the PMI until they have over 20% in equity.  So to avoid wasting money on PMI, a down payment of 20% or more is required.  To accumulate more for the down payment a person should start now.  Take amount the principal, interest, and insurance that the new house will cost each month.  Subtract off what is currently being paid for rent, and put the difference into a savings account.  So, if the new house will cost $1,500 per month, and currently you are paying $800 in rent, you should start a savings account into which you contribute $700 per month.  This will get you in the habit of paying $1,500 per month, and it will help put more toward the down payment on the house.

Preparing to buy a new home takes a lot of work.  So much that to include everything in one article would be an information overload.  In Part 2 of preparing to buy a house we will take a look at credit scores, interest rates, mortgage types, and finally the fun part: shopping for a house.  In the meantime, if you are considering buying a place, figure out what you can afford and start saving for a down payment.  The more preparation you do now, the fewer unpleasant surprises you will have later.

Check back next week as we have part 2 of this series preparing you to buy a house.

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Scott Sery

Scott Sery is a native to Billings, Montana. Within an hour in nearly any direction he can be found fishing, hunting, backpacking, caving, and rock or ice climbing. With an extensive knowledge of the finance and insurance world, Scott loves to write personal finance articles. When not talking money, he enjoys passing on his knowledge of the back country, or how to live sustainably. You can learn more about Scott on his website ScottSery.com

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