So, you have made that big decision that you want to purchase your first home. The big question now is, where do you start? Buying your first home can be quite a daunting experience because there is so much information to read and there are so many steps you need to follow in order to seal the deal.
Sure, the fun part is looking at real estate online and thinking about all of the ways you want to design your new home. The hard part is starting and working through the financial aspects of the home buying process to ensure that you can close the deal appropriately.
Here are some great financial tips to buying your first home:
Plan a Budget
First and foremost, it is important to set a budget and decide how much you want (and can) spend on your first home. By sticking to the budget, you can then figure out how much you can afford each month when you start shopping for home loans.
Many first-time homebuyers spend more than they can afford because they do not realise that it’s not just the mortgage payments they need to pay for, but also insurance, maintenance and real estate taxes. Without a budget, you could spend too much on your first house and dig yourself into big debt later trying to pay off your insurance and taxes. Otherwise, you’ll find it difficult to maintain your repayments because you didn’t budget these expenses into the purchase price of buying your first home.
The guide is to keep your mortgage, insurance and taxes associated with your new home between 25 and 30% of your income. That way you know exactly how much you will be spending every month and you can still save away some extra money for any emergency repairs or renovations that may need to be done after you purchase the home.
Settle Your Debts
Financially investing in a new home is a big decision and probably the most expensive thing you will ever buy for yourself. It is important to settle any outstanding debt you owe before applying for a home loan because banks and lenders will not be willing to lend you money if you are drowning in debt. Whether this means getting rid of credit cards you don’t necessarily use, paying off your car payments, or even selling your car so you can buy a cheaper one, it is important that you make your home loan your first priority and clean up your debt history.
Invest in a Mortgage Broker
For the first-time homebuyer, a mortgage broker can be a valuable investment because the broker can analyse your financial situation and help you find you the best home loan. A home loan can be quite complex so the mortgage broker can help you break down the complexities and they will help manage the home loan process all the way through to the settlement.
When you invest in a mortgage broker, you generally will not have to pay your broker directly because he or she receives a commission upfront from the loans in addition to receiving a trailing commission.
Variable vs Fixed Home Loan
A fixed rate mortgage is the most common type of mortgage because the rate stays the same over the entire period of the loan. This means that your monthly mortgage payments won’t fluctuate year after year.
With variable rate mortgages, they are easier to qualify for and their interest rate changes based on the economy’s interest rates. If interest rates drop, then your mortgage payments should drop, but if the interest rates go up, then you could find yourself paying a lot more than you anticipated on your monthly mortgage payments.
Bigger is Better
When it comes to saving up a deposit to put towards your new home, the bigger the better! By saving up a large deposit (20% is recommended but not required), it shows potential lenders that you have financial discipline over a long period of time and the large deposit adds more equity to your property and decreases your monthly mortgage payments right from the start which in turn means paying less interest on your home. Also, by depositing 20% into your new home, you can potentially avoid paying the ‘Lender’s Mortgage Insurance’ and you will have more home loan options to choose from.
Credit Report and Credit Scores
It is important to receive a copy of your credit report and credit scores before applying for a home loan so that you can clean up any mistakes beforehand. Before a bank decides to give you a loan, they will assess your history as a borrower because they want to trust that you will pay back the loan they are about to lend you so it is important that your credit scores are accurate and in good standing.
If your report has any errors on it, make sure to clear them up with the reporting agency before you apply for a loan because things like wrong address, incorrect payment status and accounts that don’t belong to you can appear on your credit report and damage your credit score. These are all very important factors that will affect your chances of being approved for a mortgage.
First Home Owner Grant
Another important factor when buying your first home is the First Home Owner Grant. When you apply for your home loan, also make sure to apply for a First Home Owner Grant which is a $10,000 one-off grant that is available to first-time home buyers in Australia who are Australian citizens or permanent residents. Your mortgage broker can discuss the grant with you in more detail, but essentially you apply through the lender within 12 months of settlement and you must occupy the home for at least six months within the 12 months of settlement.
Final Considerations When Buying Your First Home
Purchasing your very first home can be such an exciting milestone in your life but it is important to be mindful of your financial situation and understand what your limits are (financially) and how big of a house you can really afford. You don’t have to buy the biggest house on the block, but rather something big enough for you and financially affordable so you can still complete your mortgage payments every month and have some cash to spare in case of an emergency home renovation. These are just some great tips for you first-time home buyers who are looking to shop smart and invest financially for your new home.
If you’re thinking about buying your first home and you think your credit score might be holding you back, speak with us first. We’ll go through your situation and discuss the best option for you. We’re here to help! Give us a call today on 1300 368 322, chat with us online or fill in the contact form below to arrange a time for us to call you.