Deciding to buy a house is a major decision, and it’s one that you shouldn’t rush into. Purchasing (and owning) a house requires a certain level of fiscal responsibility and management skill. If budgeting is difficult and extra spending seems to get the better of you more often than not, it may not be the right time to think of home ownership.
If, however, you’re used to carefully managing your finances and know you have the resolve to make substantial trade-offs and cut-backs, you might just be ready. We’ve put together some basic home-buying information that you should know when looking for your first house.
Before you start searching for that perfect house, you’ll need to nail down some concrete numbers. You don’t want to find your dream house, only to realise that it’s way out of your price range! To make the actual purchase on a house, you’ll usually need to make a first-time buyer deposit and take out a mortgage to pay off the rest of the cost over a set number of years.
The easiest and most accurate way to determine your house-hunting budget is to get prequalified at your bank or through a third-party lending company. Doing so will give you a solid price, based on your annual salary and current credit score. You can still get an estimate on what you can afford from third party real estate sites, but be careful — the results you get are only general estimates that contain a lot of leeway.
The buyer deposit is one of the most important financial aspects of home buying. Once you have determined what your overall house budget is, you’ll need to calculate the amount you’ll need for this deposit.
A first-time buyer deposit is usually anywhere from 3% – 20% of the total cost of the house. 20% has long been the benchmark number, but analysts say that the average first-time buyer deposit sits at nearly £33,000. That’s an 88% increase from 2007’s average of £17,499.1
However, before you start saving for your first-time buyer deposit, you’ll need to know what kind of a mortgage you can get. Once you know how much your mortgage will cover, you’ll be able to better decide what percentage of a deposit you can handle.
It’s best to schedule an appointment with a mortgage lender, who will tabulate what kind of and how much of a mortgage you qualify for. There are some basic formulas you can use on your own beforehand to give you a rough idea of what you’ll need to be saving per month.
The rule of thumb is that your housing expenses should never exceed 28% of your monthly income. For example, if your monthly salary is £2000:
.28 x 2000 = £560
Thus, £560 is the amount you should strive to save each month for your new house. This money will go towards things like
- Mortgage principal
- Real estate taxes
- Private mortgage insurance (PMI)
- Homeowners insurance
- Homeowners Association fees (HOA), if applicable
Having to save thousands of pounds a year for a 20% down payment, or even a lesser percentage, may require some serious cutbacks. It’s a large sum of cash to save up! You’ll probably be looking at needing hundreds of extra dollars in your monthly budget in order to meet your savings requirements.
Plus, there are additional housing costs that you’ll need cash in-hand for. These include expenses like:
Closing costs: These can run anywhere from 2% – 3% of your total loan amount. For example, if you have a £150,000 mortgage, you’ll need to save an extra £3,000 – £4,500 for closing costs alone.
Other expenses, such as prepaid expenses and utility expenses, may be part of the overall closing costs, but they can sometimes be separate, additional costs. And depending on your mortgage lender, you may be required to have a cash reserve, which requires you have a set amount of cash left over after the actual purchase. It’s the lender’s way of making sure you have enough money to make your initial mortgage payments and that you don’t immediately default on the loan.
Staying Financially Prepared for Anything and Everything
No matter what, you need to ensure you have some flexibility in your budget. Financial emergencies and surprises are bound to pop up from time to time. Maybe your car breaks down or your hot water heater goes bust and needs to be replaced. Just because you’re saving for your first-time buyer deposit doesn’t mean that you can afford to wait on such expenses!
You should also take into account future expenses that you know will happen, such as car and appliance replacements. Consider opening separate savings accounts if it’s difficult to keep all these separate savings amounts clear. Have one specifically for your down payment and another for emergency and future expenses to keep everything in order. It’ll save you time and stress, since you’ll know exactly what and where your savings amounts are currently at.
1Butterworth, M. (11 January 2016). First-time buyers need a 33k deposit to get onto the property ladder and a quarter now stretch mortgages to 35 years. Retrieved 11 January 2017, from http://www.dailymail.co.uk/property/article-3390304/First-time-buyers-need-deposit-33K-says-Halifax.html
(1 June 2016). How to budget for a new house. Retrieved 11 January 2017, from http://yourpfpro.com/how-to-budget-for-a-new-house/
Mercadente, Kevin. (23 November 2015). How to best save for a down payment on a house. Retrieved 11 January 2017, from https://www.moneyunder30.com/save-downpayment-house
Mercadente, K. (15 September 2016). How much cash you really need to buy a home. Retrieved 11 January 2017, from https://www.moneyunder30.com/how-much-cash-you-really-need-to-buy-a-home