How exciting!
Here’s how we approached it. First, figure out how much you can afford to pay each month, and set your budget that way. At least here taxes can vary quite a bit by school district and they’re significant, so just saying “I don’t want to pay more than $350k” might not be good enough to stick within your budget if one house has twice the taxes of another but the same price. We put an offer on a house for $25k less than the house we ended up buying, but because of taxes the cost was about $200 more a month (so glad we didn’t get that one!)
Once you’ve determined how much you can pay per month, figure out how much you can currently save per month. I think having a downpayment of at least 10% is key, and I wouldn’t personally go below 15% or 20%. Less than that and you’ll have to pay PMI, which is mortgage insurance. For us it would’ve been $200 a month until we had paid off up to 20% of the house which could take years – I just didn’t want to be throwing that much money away every month. In my case, I was lucky to get an interest free loan from my mom to make up that last 5% – I can pay her off over the next few years and not have to worry about PMI or anything. I know others who have done the same thing, so it can be very helpful if you have a family member who could help you out.
Some banks will offer you two loans – you put 15% down on a house and they give you a loan, then you also get a loan for the remaining 5% so that you don’t have to pay PMI (I think this is called an 80-15-5 mortgage, or maybe an 80-5-15 – I can’t remember). We did consider doing this, but it worked out better to borrow from parents instead of the bank. Back a few years ago you could even put down 10% or 5% and take a loan for the rest of it, but banks aren’t offering those loans anymore and you have to pay PMI if you are going to put down that kind of deposit.
As for paying off other debts, figure out how much you would save in interest if you payed them now vs later. DH has some student loans left and we had to decide if we wanted to put a good portion of our downpayment savings into that, or getting a house sooner. It would only save us about $2k over the term of the loan if we didn’t pay it off now, and we were willing to take that hit in order to get a house sooner and capitalize on the awesome interest rates.
Interest rates are ridiculously low right now, so it’s a good time to buy because you can get more house for the same monthly payment. A friend of ours spent $100k less on his house than we’re spending (about 5 years ago), but ended up with the same monthly payment because his interest rate is about 6.5% and ours is 4.75%. A 30-year or 15-year fixed rate mortgage is generally the safest. If you get an adjustable rate, it can start climbing and you might end up with a much higher interest rate in a few years (and a much higher monthly payment).
I would agree that going to your credit union and meeting with a mortgage person is a good idea. In my recent experience, they wouldn’t tell us what we were approved for – we just told them what we wanted to spend and they told us yes or no. I’m sure we would’ve been approved for a much higher mortgage, but we knew what we wanted to pay each month and stuck to that. Don’t let people try to talk you into more! Our agent was constantly trying to get us to look at more expensive homes and calling the mortgage guy to get us approved for that price, but we just told her we weren’t interested in paying that much.
Prepare for it to take a long time! The market here is pretty good and there are a lot of houses, but we’re picky and there weren’t a lot of houses that were right for us (not to mention the 3 that fell through). We started looking last October and will move in this August.
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I do love house hunting