Though home ownership isn’t the right choice for everyone, many people aspire to own their own home. For first-time homebuyers, the ins and outs of selecting and paying for a house can seem quite daunting. The first step – besides deciding you want to take the step – is to determine whether you can afford to buy a house in the first place. This requires a financial health checkup. Your income, your expenses, your debt level, your asset liquidity, and your credit score are all factors to consider when deciding whether you are ready for home ownership.

Establishing a budget is a good place to start. This involves taking a hard look at your income versus your expenses. You will want to adjust your budgeted expenses to account for a mortgage payment, property taxes, additional utilities, and any other recurring costs associated with home ownership (like insurance) that you might not be paying now. The net result is your cash surplus. If the surplus is negative, then it means you might not be able to afford the level of house for which you budgeted. If this surplus is positive, then it means you can likely afford the house – so long as you were realistic (or conservative) in your estimates. The larger the surplus, the more confidence you can have in your ability to afford a new home while still having enough money left over to gain traction on other goals, like saving for retirement or an emergency fund.

Speaking of savings, you will need quite a bit of it before you will be able to qualify for a mortgage. The cost of home ownership is often higher than first time buyers expect, and, as a rule of thumb, it helps to save more than you think you might need. Typically, you will be required to front 10-20% of the home’s purchase price in the form of a down payment. You can secure a mortgage with 10% down, but you will often have to pay private mortgage insurance (PMI). PMI is a type of insurance that protects the lender from default risk – the chance that a borrower will not pay back the lender. This can appear in the form of a monthly premium added to your mortgage, or you might pay the total up front at closing. The cost of PMI can range from 0.55% to 2.25% of principal per year and is dependent on your credit score. If you secure your mortgage with a 20% down payment, you can usually avoid PMI. For first time home buyers, there are programs available to help avoid PMI, so speak with your lender to see if you qualify.

Beyond down payment, a successful mortgage applicant will typically be required to have a credit score of 620 or higher (740 or higher for the best rates), and it is recommended to have a debt-to-income ratio of no more than 45%. To compute your debt-to-income ratio, divide your total monthly debt payments (such as your anticipated mortgage payment, your car payment, your credit card bill, etc.) by your gross monthly income.

Once you meet the minimum mortgage requirements, you can choose the type of mortgage that is best for you and your budget. Typical mortgage terms are 15-year and 30-year fixed rate, though variable rate mortgages are also available. Fixed rate mortgages pay the same interest rate throughout the life of the loan and are recommended for those who are planning to live in their home for a long period of time. A 15-year fixed rate mortgage will have higher monthly payments than a 30-year fixed rate mortgage, but, over the loan term, the shorter loan will result in much less interest paid. This is because interest is owed over a shorter period of time and because 15-year mortgages have lower rates on average than 30-year mortgages. That said, 30-year fixed rate mortgages are easier to get, and they provide more financial flexibility due to their lower monthly payment. Variable rate mortgages, by comparison, have interest rates that periodically change along with the general direction of interest rates in the economy. This can lead to changes in your monthly payment and a change in the total cost of your mortgage over time. Variable rate mortgages can be preferable for people who plan on living in their home for a shorter period, as the interest rate tends to start lower and increase over time. Generally, what you decide will depend on your personal preferences and your level of financial flexibility.

When searching for a home, you will want to think about location. If you have or are planning on having children, location could be an important consideration, and areas with better schools tend to contribute to higher house valuations. Other considerations include square footage, number of bedrooms, number of bathrooms, acreage, lot layout, building age, style, type of heating system, garage space (if there is one), and deed restrictions. These all impact the value of a home, as does the overall condition of the market for new and used homes. Before touring homes, consider listing your preferences and ranking your priorities. This will help you later in the process when selecting among properties.

The next step is to find a knowledgeable and reliable real estate agent. Not only are real estate agents effective in helping find homes that fit your priorities, but they also handle the bulk of paperwork and negotiation technicalities, and they protect you from risks you might come across while scouting out homes. In Maine, the seller pays the commissions earned by the buyer’s agent, which is an added incentive to have an agent represent you. Ideally, your agent should not be the same agent selling any of the properties in which you are interested, as it can present a conflict of interest and result in difficulties when asking for advice on price. However, if the agent is the same person (both contracted with the seller and with the buyer), that agent has a duty to act as dual agent for the benefit of both parties – and they cannot favor one party over the other. Once you track down the perfect home, your agent will act as the negotiator on your behalf, providing the seller’s agent with your offer and helping you navigate any counteroffers. They will also safeguard the earnest money deposit that you will be required to front to secure the contract. Ordinarily, the earnest money deposit amounts to 1-2% of the purchase price. Note that once the buyer accepts your offer, you are under contract. So, if you back out for reasons other than those allowed for in the contract (such as a bad inspection report), you will forfeit the earnest money deposit.

Speaking of inspections, it’s typically a good idea that you pay to have an inspection from a qualified home inspector before purchasing a house. In Maine, where radon gas is prevalent, it can also be a good idea to pay a little extra for radon testing, too. Any deficiencies found during the inspection can be used by the buyer to negotiate better contract terms.

Once you and the seller are satisfied, a meeting to close on the home will be scheduled. Prior to closing on your new home, it is recommended that you and your agent do one final inspection of the property. This includes confirming there are no structural issues that might have been overlooked and that there are no belongings from the seller still in the home. In advance of the meeting, you will receive a Closing Disclosure, which provides the details of your mortgage loan (projected monthly payments, terms, fees, etc.). Compare this to your Loan Estimate – received a few days after applying for your mortgage loan – to verify the terms and details of your agreement with your lender. On the day of closing, bring your ID, a copy of your Closing Disclosure, proof of funds for your closing costs, and any other outstanding paperwork. At the meeting, you will sign a settlement statement that lists all costs related to the home sale, a mortgage note stating that you promise to repay the loan, and a deed of trust securing the mortgage note. You will also be required to submit your down payment and pay other fees. Keep in mind that the entire closing process can take 30 to 45 days on average to complete, and be prepared to finalize a great deal of paperwork. Once finished, the title of the home is transferred to your name and you are officially a homeowner! One additional consideration is title insurance, which protects you and the lender from financial loss due to defects in the property’s title. This is not required, of course, but it is recommended in case there were ever a title dispute.

Even after the closing process, you will still have a lot to do (and pay for). You might want to perform a few upgrades, such as painting the walls a different color. You might also need to purchase furniture, artwork, a lawnmower, a snow blower, and other household items such as tools for home maintenance. These are all essential to outfitting and maintaining your home. As we mentioned earlier, it is best to budget for these items at the start of your home buying experience, when you are still saving money and putting together a budget.

Purchasing a home is a commitment that, when undertaken seriously, can have many benefits. It is not the right choice for everyone, but it is the right choice for many. If you have questions about whether you can afford to purchase your first (or second or third) home, simply ask! We are here to help.