First steps to buying a home are often very important steps. Many people overlook so many things during the home buying process. Among those things that are vitally important is establishing a budget that your family can live with while also managing the added expenses that are part and parcel to home ownership.
The truth of the matter is that most people concentrate on the obvious things while searching for a home and simply assume that if the bank will loan them ‘x’ amount of dollars, then surely they can pay that back. The truth is that there is much more involved in the process of actually purchasing a home than merely repaying the loan from the bank.
Renters do not have to worry with many of the issues that are simply not optional for those who own their homes. For first time homebuyers and those without a substantial monetary down payment, most lending institutions will require what is known as private mortgage insurance. This is basically insurance to protect the bank if you happen to default on your home loan before you’ve managed to build up at least 20% equity in the home you are purchasing. In other words, new homeowners are required to pay the premium on the bank’s insurance. It’s understandable however as the bank is the one taking the risk.
In addition to private mortgage insurance, there is homeowners insurance to consider. Most mortgage lenders now require that you provide a certain amount of insurance placed in escrow (it was one years worth for our mortgage but it varies according to the company) in addition to adding on the amount of one month’s insurance in each month’s mortgage payments. This means that you are always paid one year in advance on your insurance and if something happens, the insurance company won’t find themselves in dire straits because you’ve allowed the insurance to lapse or simply canceled the policy. It’s another instance of the lender insuring themselves against potential irresponsibility on behalf of those purchasing a home.
Then there are taxes. No lender wants the property that they are covering confiscated and auctioned off to cover the price of taxes. Many lenders have gone the wise route and decided to require one years worth of taxes be escrowed as well. Depending on the area in which you live and property taxes in that area, this can be quite a hit up front. Add to that the fact that you are also paying monthly 1/12th of the taxes owed on your property in addition to all of the above-mentioned fees each month and you could have a hefty addition to your mortgage payment.
Of course, now is probably not the best time to tell you that you should also consider that things breaking and falling apart are now completely and 100% your responsibility to fix, repair, or replace. You will not have the luxury of a landlord or maintenance staff when you own your own property and things will need fixing and replacing along the way. So you need to begin earnest savings account in order to maintain and in some cases enhance your property.
I’m telling you all of these joys of home ownership not to frighten you off from the prospect but to encourage you to establish a realistic budget that your family can live with when estimating how many houses you can really afford. If you have all the facts in front of you it’s much easier, to be honest with yourself and plan according to what you can realistically afford and not the amount the bank is willing to lend.