Five Steps to Home Ownership
Guide for First-Time Buyers – BEFORE They’re Ready to Buy
There are tons of resources out there for first time buyers, like our first time buyers guide. These are great for people who are planning to buy their first home in the near future. But what about all of those people out there who feel homeownership is years away? How do they get their finances in order to prepare? When do they talk to a Realtor or a lender? We’ve talked to many people recently who really feel at a loss for where to begin. Younger millennials who are often saddled with high student loan debt especially feel like homeownership is a goal they may never achieve. We read a recent survey by Bankrate that showed 73% of respondents have delayed at least one major life milestone because of their student loan debt. Participants said they’ve put off buying a house (23%), saving for retirement (29%), saving for emergencies (34%) or paying off other debt (27%).
Working with first-time homebuyers is one of our specialties! We love educating new buyers about real estate, helping them find the perfect home and community, and of course, loving where they live. We always counsel first-time buyers to start the process early – probably much earlier than they had planned. We find that once buyers start looking at homes, the process speeds up. By doing all of the legwork early, buyers can take quick action when they find “the” home.
Below are the five steps we recommend taking the moment you think you might want to buy a home one day.
1) High Level Chat Over Coffee
It’s never too early to start the conversation! We highly suggest coming in for a consultation (we’ll buy the coffee) about a year before you’d like to move. Our team will guide you through the process step-by-step. We’ll discuss your timing, wants and needs in a new home, neighborhoods, and yes, budget and financing (more on this below).
2) Soul Search
This period is the time to think long and hard about your personal finances. Ask yourself these important questions — and answer honestly:
- How much you can spend monthly on rent or mortgage?
- How much cash you can part with to buy a property (down payment + closing costs)?
- How much you can save per month to put towards a future purchase?
3) Open a New Bank Account & Save, Save Save
Open a bank account dedicated to saving for your home purchase. Set up the account so that you can arrange automatic transfers into it each month (and do NOT link it to your current checking or savings accounts). With money directly deposited into this account each month, you are beginning to save for your new home. Do the math to see how much you will have saved after six months, one year etc.
Be sure to account for future income, such a raise or bonus, but also new expenses like a wedding, childcare, new car, etc. Determine when these variables could come in to play and if the savings should increase or decrease.
Save, save, save. Make a budget and stick to it or better yet, beat it. Chances are you will need to spend more than you anticipate and the more cash you have on hand after settlement, the better off you’ll be.
4) Start a Conversation with a Lender
Once you’ve secured a lender, sit down with her to review your cash reserve, your current options, and the outlook after a year of the new savings plan. Ask your lender to give you a purchase plan for both today and after the year. It’s important to note here that interest rates can change and likely will before you buy. Your purchase power may change in a year if rates change (up or down) by even half of a percentage point. Show your lender a few properties you like and she can give you a sense of the required cash outlay and mortgage payment.
Discuss the various loan structures with your lender. For instance, examine a 3.5% down FHA loan versus a 10% or 20% down conventional loan. Review down payment structures and how they affect your monthly payment. If you’re financing more than 80 percent of your new home, your monthly payments will be higher due to the required mortgage insurance.
Now, talk about options to lower your monthly payment, such as adjustable rate plans. There are pros and cons of buying your first home with an adjustable rate. First-time buyers typically don’t stay in their first home for more than 10 years and thus benefit from the lower initial rate. If, however, you keep the home longer (perhaps as an investment property), your rate – and payment – will increase.
Examine your credit with your lender to determine if you need to lower your debt-to-income ratio, credit card or car payments, or do anything else to improve this ratio.
5) Let’s Regroup
After meeting with your lender, schedule a time to meet with us again. We will regroup and talk about the next steps on your path to home ownership!
Want even more information on the steps to homeownership? Download our guide for first-time homebuyers today.
Are you looking to buy your first home? Let us help! We’ve guided countless clients through this process and would love to help you too. Reach out today.
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