Key takeaways

  • Before you buy, make sure you have a solid financial foundation in place
  • Understanding the psychology of home buying can help you make smarter, more informed decisions
  • Work with professionals you trust to navigate the entire process with confidence
  • The cost of homeownership, and how much you can afford, goes well beyond the monthly mortgage payment
  • With the right plan in place, you’ll be celebrating, not regretting, the biggest purchase of your life

Buying a home is the largest purchase most people will make in their lives. Buying your first home is not only a big financial decision, it’s your first time going through the entire buying process. Put these two things together and you have an experience that can be quite stressful, emotional, and exciting at the same time. All the more reason to make sure you educate yourself, have a plan, and make smart decisions.

Here are the keys to unlocking a stress-free experience and navigating the process with confidence.

Get your financial house in order

Before making any big decisions, make sure your own financial house is in order. This means having an appropriate emergency fund, savings for a down payment, a plan to manage any other debt you may have, a healthy credit score (this can substantially impact the cost of your mortgage), and even a plan to save a little bit of money for retirement. You want to put your first home on top of a solid foundation. If not, you may notice a few cracks over time.

Understand the psychology of buying a home

It is well documented that people make poor financial decisions during periods of heightened stress and emotions. Buying a home elicits both. If we aren’t careful, an emotional response or a feeling about a house can nudge us towards a decision that isn’t in our best interest.

To avoid this, you need to be aware of the emotional responses and counteract them. Try these two things (we included a few examples as well):

  1. Make a list of what you value: time with friends and family, short commute, active lifestyle, career opportunities, etc.
  2. Make a list of what you want in a home: minimal maintenance, a yard, access to parks or a community center, space to entertain, etc.

When shopping for the home, keep these lists with you. The more you anchor in what’s important, the more likely you are to make a smart, informed decision.

Work with the right professionals - create your dream team

It’s important that you get professional guidance to make the right decisions and navigate the process with confidence. There are three professionals you need on your team.

1. Mortgage loan officer 

The loan officer will help you with everything related to your loan. They’ll approve you for a specific loan amount and monthly payment, educate you on down payment options, and let you know about any first-time homebuyer programs in your state.

2. Real estate agent

A good real estate agent is essential to your home search. In addition to helping you find the right home, they can help you determine a fair price for the home you want, make your offer, negotiate with the seller, and navigate the entire process.

3. Financial planner

Working with a planner is one of the best decisions you can make. They can provide unbiased advice around your down payment and loan options, how much you should pay for the house, the right level of insurance (you’ll need an insurance agent too), and how this purchase will affect the rest of your goals.

Know how much house you can afford

The most important thing to understand is that the responsibility of owning a home is about more than just your monthly mortgage payment. Here’s what you need to consider.

  • The monthly payment - Your total monthly expenses related to your house should not exceed 28% of your before-tax income. This isn’t always the right number for you but it’s a great place to start. Keep in mind this should include your principal, interest, taxes, insurance, AND maintenance costs (do not underestimate the cost to maintain a home).
  • Approval ≠ Affordable - Just because you are approved for a loan amount doesn’t mean it’s the amount you can afford. Loan officers can approve you for a loan payment that is over 40% of your before-tax income. You really want to be closer to the 28% number we mentioned above.

Let’s look at an example:
For simple math, let’s assume you make $10,000 per month before taxes. After taxes and benefit deductions (health insurance, retirement plan), you may only bring home about $6,000. If your mortgage payment is 40% of your before tax income ($4,000), it is now 67% of your take-home ($4,000 divided by $6,000). This wouldn’t give you much wiggle room in your overall budget.

  • The added costs - Make sure you account for moving costs and new furniture. They can add up to thousands of dollars. And, as every new homeowner knows, you will be 50 dollar’ed to death (light bulbs, cleaning supplies, pots and pans, towels, the list goes on and on). Keep in mind any projects you have planned. New paint and floors can add up and bigger projects, like bathroom and kitchen remodels, need to be planned for.
  • Seeing the bigger picture - When buying a home, don’t limit your planning to the next 6 to 12 months. Think about the next 3 to 5 years. Will you get married, start a family or have another child, change jobs? What milestones do you need to plan for? Saving for an education, buying a new car, or investing for retirement? Buying a home needs to be a part of a broader plan.

Create your well-informed plan for your first home

Ready to buy your first home? Now it’s time to make it a reality. Create a realistic savings plan to put you on track to save for your down payment and closing costs. Keep in mind there will always be trade-offs between saving for your home and other milestones. That’s OK. The key is to have a plan to get you into your first home and back on track with your savings once you move in.

Creating a plan for your first home that accounts for all facets of your finances and your life is essential to navigating this process with confidence. With the right strategy, you’ll soon be in your first home, celebrating in style with your very own housewarming party.

If you want help navigating this decision with confidence and making your first home a reality, schedule a free introductory call with a CFP® Professional at Facet.