5 Things that Can Hold Up Your Home Purchase and How to Get Ahead of Them Now

I was talking to a friend recently who told me her daughter wanted to buy her first home. She was tired of renting but worried that having a mortgage would mean she couldn't afford to do anything else. I could totally relate. 

For most people, deciding to buy a house is a huge decision. And when home prices and mortgage rates are high, it can be daunting. I know from experience. When we were in the market for our first home, the economy was uncertain. And so were we. Owning a home was just one of our priorities. We also like to travel, entertain, and give to charity. These things bring joy to our lives. Would having a mortgage mean we had to give them up? Were we ready to?

It quickly became clear that buying a house was a big financial decision, and there was a lot more to consider. That's why when first-time buyers come to me with questions, I suggest they do these five things before stepping into that first open house.

When it comes to affordability, the price of a house is one thing; how making a monthly mortgage payment and maintaining a home will impact your life is another. So, the first thing you need to do is prepare a personal budget. For instance, we had to ask ourselves, how much of our monthly budget did we want our mortgage to take up? Could we carve out enough to cover the ongoing costs like real estate taxes, homeowners' insurance, and maintenance? What could we comfortably add to our current budget and still enjoy the other things in our life? 

I understand it's not easy to find extra space in your budget when the cost of groceries keeps going up, student loan payments are due again, and other debts may be a factor. You need to take a detailed look at all your current expenses and decide what trade-offs you'd be willing to make to cover the added costs of owning a home. 

Then look at the big picture. How much debt do you already have, and how much more can you take on? A general industry rule of thumb that says no more than 28% of your gross income should go toward home debt; and no more than 36% toward total debt. Can you stay within that?

Once you've decided how much of a mortgage payment you can handle, talk to a lender and get pre-approved. A lender will look at the financial details—assets, income, debt ratio, and more—and help you with a number. You might be surprised that the bank says you can afford more house than you thought. I was. But don't be lured into taking on a bigger mortgage—and bigger mortgage payment—than you want. It's not just about money, but your overall quality of life. Stick with your priorities.

If you haven't already, start saving for a down payment now. The ideal is to put 20% down. With median home prices just over $400,000, according to the National Association of Realtors, this can be upwards of $80,000, depending on where you live. That's a big number, and it can take time to save what you need. That's okay — having a budget and a plan can help you get there. In general, the more you put down, the easier it will be to qualify for a loan and the better interest rate you'll get.

Plus, with a 20% down payment, you can avoid Private Mortgage Insurance (PMI). PMI is insurance the bank charges you to protect themselves (not you) if you cannot make your mortgage payment. If you fall short of the 20% down payment, this cost will be added to your monthly payment. Then, you'll pay PMI until the loan to value of your home reaches 80%. With a new appraisal, you might then be able to drop PMI.

Also, other types of loans, such as FHA and VA, don't require such a high down payment. Your lender can help you explore and understand your options.

When it comes to a mortgage, it's important to dive into the details. For instance, a fixed-rate mortgage is more stable and predictable. You'll generally have the same payment over the life of the loan. However, if taxes and insurance are included, your payment could go up—or down—which can take people by surprise. 

An adjustable-rate mortgage may catch your attention because it initially offers a lower interest rate for a while, say five years. But then it resets. You may think, "Great, I plan to sell before then, or refinance." But I always caution that you be willing to take on the risk that interest rates could rise before you can follow through with your plan. 

You may also have heard about mortgage buydowns. This means pre-paying upfront to reduce your interest rate over a set period. If you have more cash on hand, it could save you significantly over time.

No matter which type of mortgage you choose, get the specifics from your lender. Read the fine print, and know what it means for your current and future payments.

It's always wise to know your credit score. It's genius when you're in the market for a home loan. The better your score, the better loan deal you'll likely be able to negotiate. If your score needs a boost, pay your bills on time and keep your credit balances low. And it's best not to open any other credit accounts while shopping for a loan. Each inquiry could be a hit on your score. If unsure where you stand, request a free credit score from the three major credit agencies.

Owning a home is both a financial and an emotional responsibility. The thought of losing it can be scary if something unexpected should happen like a fire, or if you were to lose your home due to a health issue or job loss. So prepare in advance. 

Ensure you have an emergency fund to cover three to six months of essential expenses, including your mortgage and other home-related costs. Compare home insurance policies ahead of time and know that they will likely increase in the future. How quickly and by how much depends on where in the country you live. The impact of more severe weather in greater frequency is pushing insurers to raise premiums countrywide. 

Consider both short- and long-term disability insurance. See what your employer offers, and if that's not enough to cover your expenses, look at private policies to supplement it. It may be an extra cost now, but it can keep you from losing sleep—and possibly your home—in the future. Lastly, make sure you have adequate health and dental care coverage. Overdue debt for medical bills can snowball quickly.

The bottom line is that buying a home is both a financial and a life choice. If you've taken these five steps and are ready, buying your first home can be a smart way to help build future wealth. But to me, it's also personal. If owning a home will be a financial burden, stop and think. If it will bring you joy and fulfillment, go for it.

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