Hi friend, welcome back. Today’s post is Part 2 on How to Buy Your First House, or How to Get Started in Real Estate as A Complete Beginner.
But as a quick recap, I personally got into real estate when I was 24 years old, single, and making only $16/hour. And I would 10/10 recommend.
Maybe you’re feeling like real estate is impossible for you in your personal situation, but I want to encourage you that it’s not impossible, and I want to walk you through it today.
DISCLAIMER:
As a quick disclaimer, I am not an expert or professional on these things. This content is meant for educational and entertainment purposes only. Please be sure to reach out to a professional if you need serious advice.
Ok, with that out of the way, let’s go ahead and jump right into this step-by-step guide.
The first thing we’re going to do is learn how to use a mortgage calculator to get an estimate for how much house you can afford.
Now, one thing is very important for your success: we want to make sure that we are not going to have a monthly mortgage payment that is more than 25% of our monthly take-home pay (after taxes).
So let’s walk through this together. And if you’d like to see me do all of this on my screen, you can check out the video linked above. I show how to run these numbers until you get what you’re looking for.
But if not, just go to Google and type in ‘mortgage calculator’, and then you should see something that looks like this:
So on the top you can toggle to monthly payment or purchase budget, and we’re going to start out on the monthly payment side.
Now you can do it first without the taxes and fees to get a super simple and quick estimate, but that estimate will be considerably rough.
I’d rather go ahead and toggle to include those taxes and fees and try to get a somewhat more accurate number.
So now scroll down a little and go ahead and make sure the correct state is entered, update the credit score to what you think yours is. If you’re not sure, you can get a rough estimate on Credit Karma and that will be good enough for these purposes.
Now if you have any more information to add in here, go ahead, but otherwise you can ignore the rest of the boxes for now.
So you can see that any change you make on the left side will affect the numbers you get on the right side, for monthly payment and loan amount.
But we will come back to this in just a minute to figure out your purchase plan. First, let’s take a look at how to use the other side, the Purchase Budget side.
So go ahead and toggle to the Purchase Budget side on the top and now what you should see is this:
On this side, go ahead and enter your correct pre-tax yearly household income and the total monthly payments you make on debts. And again, change the state and credit score to reflect accurately.
Ignore the rest for now. Again, you can see that the numbers on the right side change based on our adjustments.
Great! Now that we are comfortable using these calculators, I’m going to walk you through figuring out your very own purchase plan.
Now we’re going to use this calculator to determine how much down-payment you want to save up for.
This is subjective, but you can play around with the numbers to see how your down payment is going to affect the amount of house you can buy, as well as your monthly mortgage payment.
Here are the steps:
1.
Start on the Purchase Budget side, making sure your Income, Debts, State, and Credit Score are as accurate as possible.
And I’m not necessarily saying you need to scrap all your products, but perhaps they can use tweaking once you do your due diligence in these areas.
2.
Enter any down-payment amount that you feel comfortable with. This will give you new numbers on the right side.
3.
Now take from the right side, the ‘Mortgage amount’ number, and copy it.
4.
Next toggle back to the Monthly Payment side and enter that number that you copied, into the space called “home price”.
5.
Also copy and paste the down-payment amount that you put into this side as well.
6.
This will update the numbers on the right side once again. Take a look at the “Total monthly payment” number.
a) This number, we want to be about 25% of our monthly take-home pay (the after-tax amount that actually hits your bank account.)
b) If you’re unsure, just copy that number and multiply it by 4 in a normal calculator. And if that sum is the same as or less than your take-home pay each month, then you are in good shape!
7.
Now if the “Total monthly payment” is higher than 25% of your monthly take-home pay, you have 4 options to be able to lower it:
a) You can increase the down-payment (we’ll get into how to actually save up enough for this in just a minute.)
b) You can decrease the home price.
c) You can pay down debt and therefore decrease your existing monthly debts payments.
d) You can use a combination of these.
8.
In addition, if you want a higher purchase price, or to buy a more expensive house, all you need to do is increase your down-payment, or decrease your existing monthly debt payments.
As you may have noticed while playing with these numbers, if your debts are out of control, they will really put a damper on how much house you can buy.
I chose to pay off my debt before saving up for my house, and that really helped me to have a lot more purchasing power on my low income.
So I do recommend doing that first if you are having a hard time getting these numbers up high enough.
Another thing to note is that some people say 30 year mortgages are not good to use because they tie you down for so long. But I personally disagree.
In the end, for people like me with a low income or other challenges, a 30 year mortgage will help you to get started in real estate when you otherwise wouldn’t be able to afford it.
And you can always refinance later if you want to. I used a 30 year mortgage on my first home and have not regretted it in the least. (I do believe in paying it down early if possible though, but that’s another discussion.)
Once you have your goal, it’s time to get serious. Take some simple steps to start improving your credit score and paying off debt if needed.
Then, find ways to pile up cash, whether that’s by cutting back drastically on your spending, or by ramping up an extreme amount of overtime and side hustles.
And to be honest, If you are someone who is dealing with a low income or even just a low margin for savings in your budget, then you probably need to do both.
That’s what I did when I bought my first house.
And this does require quite a sacrifice for a year or two, I’m not gonna lie. But then it’s over and it’s all worth it in the end.
So the goal here is to lower your debts, improve your credit score, and get a higher down payment ready.
Because, like we saw in step 2, these things are going to give you the leverage of affording more house, on a lower monthly budget.
And if you’re not sure where to start, I would recommend paying down all your debt first, and then building up your down-payment next.
You need to have a plan. You can’t just start working your butt off.
You did the calculations, decided how much you need to save, found ways to save up lots of cash, but now you need to have a plan. And you need to have an end date to that plan.
End Date
Before you even start, the first thing you need to do is to set an end date to your savings madness.
I worked 50-60 hours for about a year straight, and then I went back to normal hours.
You can’t go too hard for too long. I would recommend only doing this for anywhere between 6 months and 2 years. If you push yourself too hard, you could really cause some damage to your own health.
And it can also sabotage your success by discouraging you, causing you to spend the money you’ve been working hard to save.
Visual Representation
Another thing that can also surprisingly help you to succeed in this step is to actually give yourself some sort of visual representation of the progress you’re making.
For example, you can make a paper chain with each link representing one hundred dollars saved. And each time you save $100 more, you take one link off.
Or, what I like to do is just grab a piece of paper and draw myself a tube that I’m going to fill up as I go.
But there’s a lot of different things you can do like this, and I just think a lot of people’s brains, like mine, work visually and this really helps.
There are even savings challenges out there that can guide you in the process and I will try to link one on the screen.
But make sure that you create some form of visual motivation for yourself. Whether that’s a paper chain, a progress tube, a savings challenge, or something else.
Just find some way to show yourself a continuous reminder of your goals and progress. Because these visuals tend to go a long way.
Go hard at it. You need to stick to it, and get it done within the timeframe you set for yourself. Do NOT move the goalpost.
You have to push yourself to get it done when you said it would, but if you keep moving the goalpost back, this is a never ending cycle that will literally make you sick.
You cannot push yourself too hard for too long. That’s why you have to have a goal, you have to have a plan, and you have to stick to it.
Once you’re getting close to your target, let’s say you’re within a couple of months of reaching your goal, now it’s time to start talking to the professionals.
Talk to a few real estate agents, until you find one who feels to you like they’re being honest and genuine and you can trust them.
They should not feel pushy at all. They shouldn't make you feel silly or small when you ask questions.
This person should genuinely want the best for you and your financial situation. And they should be experienced.
You definitely want someone experienced. Don’t feel pressured to use Cousin Jimmy because he just got his real estate license.
From there, you’re going to be connected with a loan officer to be pre-qualified for a mortgage loan, and it should look similar to the calculations that you already did yourself.
Once your pre-qualification comes back, you’ll be able to start the fun part of shopping for your first house!
You’ll be well on your way to success in real estate and reaping long-term benefits of all your hard work and dedication!
Alright, that’s gonna do it for today guys, but let me know in the comments what you think and if you have any questions that you want me to cover on this topic.
And if you made it to the end of this post, I’m so honored that you would take your time to be with me and I truly hope this information was helpful.
Until next time, just remember that you are loved, you are not alone, and you’ve got this!