How to Buy My First Home - Where to Start
Part of adulting is considering home ownership. One of the first things to consider is whether you are ready to buy a home. One aspect to consider is being financially ready and able to purchase. If you have rented in the past, especially if heat was included, home ownership may include costs you have not had to budget for in the past. You will want to consider potentially new expenses you will have to manage as a homeowner:
real estate taxes and property insurance (escrowed by lenders to be your monthly "mortgage" payment, on top of the principal balance being paid back plus interest)
water plus sewer or septic pumping expenses
heat and hot water
landscaping and snow removal
Private Mortgage Insurance (PMI), if needed, explained later
Home Owner Association fees (HOA), if in a condo or association
large system maintenance/failures (roof, furnace, plumbing, septic systems, electric)
Depending on your current rent, ownership might be more expensive monthly! However, over time, rents historically continue to increase, while a fixed rate mortgage payment increases at a lower rate with the town tax increases. The majority of the mortgage payment is locked in with an amortization table established the day you buy which includes the paid off date.
If you still want to move forward with the "American Dream" of homeownership including:
historical long-term appreciation, check a local home if bought 5, 10 & 20 years ago,
annual tax deductions of interest paid on your mortgage, highest in early years
the $15,000 first time buyer federal tax credit of 2021,
freedom from your rental being sold out from under you, and
then want to roughly calculate the funds required to complete the purchase. Starting with rough numbers will help you decide if you want to find a Realtor and Mortgage Broker. Even if you are planning to borrow part of the down payment as a gift from family or withdraw from your 401k with the home purchase exemption, why not crunch the numbers and figure out how long it would take to save what is needed?
First to consider is the down payment, from 3.5% for Federal Housing Authority (FHA) Loans and 5% for Conventional Loans at a minimum. If you put less than 20% of the purchase price down on your home purchase, you will likely have to pay PMI (Private Mortgage Insurance) in addition to the principal and interest. For example, on a $420,000 home purchase, this would require $14,000 (3.5%) on an FHA Loan or $84,000 (20%) to avoid PMI charges, unless it's a Veteran's Association (VA) Loan or other specialty loan.
To estimate what your usual monthly expenses will be try Mortgage Calculator | RamseySolutions.com This calculator estimates property taxes, insurance and Home Owner Association (HOA) fees. When you find a property of interest, you can get closer with the estimates or your lender will crunch them for you. To estimate the property taxes, divide the annual amount from the town by 12 for the monthly amount needed, property insurance, PMI if under 20% down, and HOA fees are only needed if you are purchasing a condo or in an association.
Beyond the down payment you will need and being sure you can manage your ongoing monthly mortgage payment (Principal, Interest, Taxes, Insurance, PMI if applicable, HOA if applicable), a large one-time expense needed are your closing costs. One of the easiest ways to estimate for the closing costs is taking 6% of the purchase price. If you save too much, you can use it as additional down payment or set it aside for the emergency fund you will need for major system failures.
Closing costs include:
a tax stamp fee, in NH it is $7.50 per thousand, for a $420,000 it would be $3,150,
a title search and title insurance to ensure no one comes back to make claim to the property
mortgage origination fees,
mortgage processing fees, (ie - the appraisal verifying the contract price is correct,
proration of taxes due or prepaid,
proration of fuel left in the tank for heating or cooking A strategy buyers sometimes use is asking for closing costs to be covered by the sellers and taken from the purchase price. In this seller's market, you will need a great agent to structure and negotiate this, but it can be done!
While there are many items to consider, remember you can do this, and we can help!