How to Buy a House: Part 2 – Figure out the Money

This is part 2 in my mini-series on home buying. If you’d like to start from the beginning, click here.

If you weren’t already aware, buying a house is expensive. It’s likely the largest single purchase you will ever make (although bankrolling your children’s private college education could be a close second), and tension will always be high when that much money is involved. As the old adage goes: mo’ money, mo’ problems. Tackling the financials head-on can help reduce the mo’ problems part, so here we go!

STEP 2 Figure out the money stuff

Get pre-qualified and pre-approved. 

  1. Pre-qualification is the first step in securing a mortgage. The process is generally pretty simple and can be done over the phone. You provide your financial information to a lender, and they give you an idea of how much mortgage you could qualify for. Here’s a calculator if you want to try it yourself.
    • Because this process doesn’t require you to submit any official documentation that the lender double-checks, this number is purely an estimate. It’s good to have if you’re toying with the idea of buying but aren’t ready to commit just yet.
  2. Pre-approval is what you need to get from a lender when you decide you’re serious about buying. The process is much more involved; you’ll need to supply the mortgage lender with appropriate documentation for them to do a thorough financial background check. There may be a difference between the amount for which you qualified and were approved.
    • While you can look at houses with only a pre-qualification letter in hand, sellers favor those with a pre-approval letter. This is because the lender has already thoroughly vetted your background and the financing is less likely to fall through.

Cross-check your approval amount with your monthly budget.

It’s likely that you’ll be approved for a larger mortgage than you can actually afford without changing your current lifestyle. The last thing you want to do is spend most of your income on a beautiful house but have so little leftover that you never actually leave it. Now is the time to cross-check your approval amount with your monthly income to see how much you can actually afford.

  • Let’s say a lender approves you for a $500,000 mortgage. With an (optimistic) 20% downpayment of $100,000, 4% interest, and a loan term of 30 years, your monthly principle and interest payment will be $1,910. Accounting for property tax (in Austin, about 2.5%) and homeowners insurance (about $1,000/year)…your monthly out of pocket becomes $3,035. Calculate your own monthly breakdown here.

help-me-im-poor

Other things to consider

  • If you put down less than 20% on your home, you’ll have to pay private mortgage insurance (PMI). This is to protect the lender if you default on your home loan. Crappy, I know, but you don’t have to pay it for the life of the loan– just until the outstanding balance drops below 78%.
  • The US Department of Agriculture provides assistance to those looking to settle in rural communities, FHA loans can reduce some of the financial pressure on first-time homebuyers, and homeownership vouchers can help low-income families transition from renting to buying.

Cue hysterical crying. We’ll be talking about the fun parts of home buying next, so hang tight! 

But until then,
I’ll be right here.

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