Empowering First-Time Homebuyers: The Ultimate Budgeting Handbook

Empowering First-Time Homebuyers: The Ultimate Budgeting Handbook

Buying your first home is one of the most important purchasing decisions that most people will make in their lives.

There is a huge amount to consider when you are buying your first home. Savvy consumers are inclined to do everything that they can to make sure that their purchasing process is as logical and conscientious as possible. It’s important to know what you’re looking for in your ideal first property, from its location, to its architectural style, and of course, what kind of home loan you’d ideally like to secure.

For many first home buyers, the process of purchasing a property can be incredibly daunting. However, by taking the time to assess your options, look over your finances and prepare yourself properly, you can ensure that you find the perfect property for you and your family. As every first home buyer’s situation is unique, you need to take an approach to set a budget that works best for you.

Continue reading for a quick guide on Empowering First-Time Homebuyers!

What Can You Afford?

As a starting point, it’s good to determine just what your borrowing power is likely to be based on your income and debt, otherwise known as calculating your debt-to-income ratio. This ratio quantifies your total monthly debt divided by your gross monthly income.

In today’s turbulent markets, first-time buyers seeking to navigate their purchase conservatively should use the 28% rule as a guide. Your first mortgage should not consume more than 28% of your gross monthly income. Lenders prefer to see a debt-to-income ratio of 43% or less.

As a first-timer, assuming you can afford a home loan no more than three to five times your current income is wise. If you have no significant outstanding debts, lean more towards five times your current income. If outstanding debt requires 20% of your income, this knocks your initial estimate down to four times your current income. Finally, if more than 20% of your monthly net income goes to satisfy the outstanding debt, it’s safe to settle on a purchase price goal of three times your income.

For example, let’s say your monthly expenses total $1,000. Your monthly home loan payment is $1,000, for a total monthly outlay of $2,000. Your gross monthly income is, let’s say, $6,500. $2k divided by $6.5k gives you 30% of your monthly income satisfying the mortgage payment. This comes in below 43% but still above 28%. Your numbers will obviously vary, but this example is what the process will look like as you consult with prospective lenders.

Other Monthly Expenses

As first-time homebuyers, don’t forget to factor in all of your recurring monthly expenses in addition to your mortgage payments. Do you have a car payment and insurance? Upon buying your first property, you’ll now have homeowner’s insurance payments, monthly utilities such as water, electric, gas heating, landscaping, etc., maintenance fees and unforeseen repairs to consider alongside these ongoing existing expenses.

You may also have to pay ongoing owners corporation fees if you’re looking to buy a strata title, these being properties that are located on blocks or in complexes. First-home buyers that purchase a townhouse, unit, or apartment will likely have to pay quarterly or annual owners corporation fees, which are designed to cover the maintenance or upkeep of common property like driveways, garden beds, or other amenities that are available for all tenants to use and enjoy.

While the initial calculations based on the monthly income above may seem doable, it’s wise to factor in a “buffer” to account for these miscellaneous expenses when making these estimations.

Down Payments And Closing Costs

Expect most lenders to require an upfront down payment of at least 20% of the property’s purchase price to qualify for any kind of home loan. If you cannot meet this payment as first-time homebuyers, you’ll be required to pay Lender’s Mortgage Insurance (LMI), an often large and upfront expense designed to provide lenders with a little more protection in the event that you’re unable to make your loan repayments. The value of your LMI is largely dependent on the purchase value of your property. You can anticipate your LMI to be between 0.5% to 1% of your overall home loan amount, this being the sale amount of the property minus your deposit.

The LMI you pay depends on a few variables, such as your borrowing power, the size of the property, and its expected appreciation or depreciation. In general, if you make a large down payment, you can expect lower monthly mortgage payments, in addition to a smaller (or no) LMI, and of course, lower interest paid over the course of the loan term.

Finally, don’t forget the closing costs. These are fees associated with the creation of the mortgage, including taxes, appraisals, inspections, attorney fees, and loan origination fees charged by the lender. Typically, you can expect to pay between 1% to 4% of the loan amount.

Personal Savings Requirements

It’s wise to have savings equal to your annual income on hand as first-time homebuyers. This way, you have the means to cover most of the upfront costs associated with buying your first property, such as the down payment and closing fees. Picture things in terms of buying a home worth four times your annual income. One-quarter of that home’s value (equal to your annual income) is 25%, which accounts for your down payment; thus, you’ll avoid the LMI.

To save money in the long term, you really want to avoid paying lender’s mortgage insurance if you can. For this reason, many first home buyers are encouraged to save up a down payment that’s at least 20% of the overall sale value of that property. Granted, saving up a 20% deposit is easier said than done, especially if you’re looking to buy a property at auction and have less influence over the final sale price of that property. 

If you are able to save up a 20% deposit, however, you’ll find that removing the need to pay LMI can actually provide you with more financial freedom when finalising your property purchase. Instead of giving even more money to your lender, you can put that amount towards closing, preliminary property maintenance, or even future home improvements.

Find The Right Financing For Your New Home And Begin The Search

Once approved, be sure to take the time to shop around for the best rates to save even more. It’s important to keep in mind that this can be a long-term process that can potentially lead to considerable profits if you lay the proper foundations. As first-time homebuyers, don’t borrow more than you can afford, stay within your monthly budget, and don’t forget to keep those cash savings on hand for emergencies. With the right financing secured, you can officially start the exciting process of searching for your new home.

---

Purchasing A Home Can Be Less Challenging
When You’re Planning Ahead!