(First of a two-part overview for first time home buyers)
Congratulations! You’re ready to purchase your first home. You have probably given a lot of thought about what you want in your new home, such as neighborhood or community, number of bedrooms, amenities, etc., but…have you given enough thought to exactly how much house you can truly afford?
The rule of thumb is to find a house that costs about 2.5 times your gross annual salary, and to have a debt-to-income ratio no higher than 43 percent of your monthly income. Your mortgage, as well as any installment and/or revolving credit, would be considered “debt.”
“People are often approved for a mortgage amount that might be higher than what their budget will realistically allow,” says Robert Dunn, Community Outreach Manager for Consumer Credit Counseling Service of Buffalo, Inc.
“It can be very tempting to then spend more money on a house, with the mindset of ‘we’ll trim expenses to make it work.’ That can be a huge pitfall, because they’re likely not considering the other expenses that go in to purchasing a home or might not be willing to adjust their lifestyle to make that mortgage affordable,” he said.
Using an online calculator, such as mortgagecalculator.org is a good way to start the process of determining how much house you can afford; however, the math isn’t as simple as plugging in the cost of a house and dividing it by 360 months (a 30-year mortgage). Other expenses, such as the down payment, homeowners’ insurance, private mortgage insurance (PMI) and closing costs, must be considered. Typically, three percent of the purchase price is the minimum amount allowed; to avoid paying PMI, though, you’d want to shoot for at least 20 percent.
“There are also additional expenses, such as appliances, furniture, renovations or repairs and utilities, that homebuyers need to keep in mind, especially if they’re moving from an apartment into their first home,” says Dunn. “When you don’t realistically look at what you can afford, that’s when the trouble starts.”
Fortunately, there are several programs available to help guide first-time homebuyers. The First Home Club (FHC) is a grant program through the Federal Home Loan Bank of New York designed for first-time homebuyers. For every $1 you save in a dedicated FHC savings account, you will receive an additional $4 in matching grant funds (up to $7,500) toward your down payment and closing costs. This program is offered through the Consumer Credit Counseling Service, as well as many area lenders, such as M&T Bank.
“The First Home Club is a great way for income-eligible first-time homebuyers to save for a house,” says Julie Picone DeGlopper, Retail Sales Manager in M&T Bank’s Mortgage Department. “And there are other programs available as well. Some offer low down payment options and special waivers for veterans.”
DeGlopper also recommends buyers obtain a mortgage pre-approval, which provides the confidence of knowing how much they can afford before they start looking for their new home. It will help determine which mortgage product is best, provide an estimate of the anticipated mortgage payment and an estimate of funds needed for closing. In most cases, buyers can get pre-approved over the phone in a few minutes.
Consumer Credit Counseling also offers regular workshops for first-time homebuyers that explain the entire home-buying process, starting with budgeting, understanding credit scores and how that impacts purchasing a home, what lenders look at and so much more. “It’s great preparation and can give you the tools to save a lot of time, money and frustration,” says Dunn, who recommends people take the workshop before they get too far into the purchasing process.
Other organizations, such as Belmont Housing Resources for WNY and West Side & Black Rock-Riverside Neighborhood Housing Services, offer similar programs, including financial education workshops, first-time homebuyer education workshops and classes geared toward new homeowners.
“I think the biggest mistake first-time homebuyers typically make is not being well educated enough about the process,” says Dunn. “You want to fully comprehend what’s involved well before you start the process, and not learn the hard way after an offer has been put in and you’ve signed a contract. Doing your homework can you save a lot of time, aggravation and, certainly, money.”
(PART 2: What to look at when looking for your dream home)
Belmont Housing Resources for WNY, 1195 Main St., Buffalo and 33 Spruce St., N. Tonawanda; 884-7791; belmonthousingwny.org.
Buffalo Urban League. 15 Genesee St., Buffalo. 250-2400; buffalourbanleague.org.
West Side & Black Rock-Riverside Neighborhood Housing Services West Side NHS (Monday-Thursday, 8 a.m.-6 p.m.); 359 Connecticut St, Buffalo; 885-2344
Black Rock-Riverside NHS (Tuesday-Friday, 8 a.m. - 6 p.m.); 1943 Niagara St., Buffalo; 877-3910; wsnhs.org.
Evans Bank First Home Club; 926-3313; evansbank.com.
Consumer Credit Counseling Service of Buffalo; 40 Gardenville Pkwy., West Seneca; 712-2060; consumercreditbuffalo.org.
M&T Bank First Home Club: Visit or call your local branch; mtb.com.
(Nancy Cardillo · morethanwords.org)