How do I buy a home? –Alison
The real estate market is soaring.
But Millennials shouldn’t feel pressure to get in on the action, according to financial experts. They’re the largest group of homebuyers in the market today.
Buying a home is one of the most— if not the most — significant purchases of your adult life. So, you’ll want to make sure you’re really ready.
Here are three steps that’ll help you do that:
Sort your money out
First and foremost, get your finances in order before skipping off to find your dream home. This means understanding your total income and what it can buy.
While there are lots of online calculators out there to give you some quick numbers, approach with caution.
“Calculators online can be deceiving in that they don’t consider all expenses,” says Brett Spencer, a financial planner with D3 Financial Counselors.
The general rule according to experts is to spend no more than 30 to 38% of your monthly (pre-tax) income on housing costs. This includes all costs involved in homeownership — from monthly loan payments to insurance. But you may need to err on the conservative side if your expenses are high.
Next you’ll need to figure out exactly how much you should have saved.
Sure, you’ll need enough to afford a down payment on the house — typically about 20% of the purchase price. In some cases you might be able to put down significantly less, though you’ll probably be required to pay mortgage insurance as well.
But having a down payment isn’t enough. You may also need savings to cover a couple months’ worth of mortgage payments that the bank will expect to see, plus enough to cover home insurance and possibly mortgage insurance, and also closing costs — between 2 to 5% of the purchase price — before you get to the closing table. Plus, you want to make sure you have enough to buy furniture, still pay your monthly expenses, and cover emergencies, too.
While that sounds daunting, a little careful planning can get you there over time.Budgeting is a big part of the process, so allocate what money you’ll need by setting up a savings account toward getting your future house.
So where do you find the savings?
If you’re living paycheck to paycheck, it’s time to get comfortable and take a close look at your budget to figure out where you can cut back.Financial planners recommend sitting down with a professional to look through your finances and form a game plan.
Elizabeth Miller an adviser with Summit Place Financial suggests living in a low-rent apartment to save for the down payment on your future home.
“Save any extra income — put aside bonuses or incentive payments you earn,” says Miller.
Shop around for your mortgage
Since a home is a pretty big purchase, you’re probably going to need a loan. But there are a wide variety of mortgage options to choose from. Work with a professional mortgage provider before house shopping to go over the options and figure out what you qualify for.
It’s probably a good idea to stick to the basics. The most common mortgage is a fixed interest rate over a number of years — usually either 15 or 30. The main benefit of a fixed rate is consistency, meaning steady payments over the life of the loan. While 15 years of payments will save you money on interest and allow you to pay off your loan sooner, spreading the loan out over 30 years might make the monthly payments more affordable for you.
The mortgage qualification process is called pre-approval. If you get pre-approved for a mortgage of a certain amount, the lender will give you a letter that you can present to sellers to show you have access to the money for the home you’re bidding on.
To move forward with the pre-approval process you’re going to need good credit, at least some money to spare, and a steady job.
Keep in mind, mortgage lenders will require protection in case you default on paying your mortgage.
“As a first-time buyer, you usually add insurance to your mortgage,” says Miller.
But a higher down payment could spare you the added expense of insurance. According to Miller, most lenders will want a down payment of at least 20% to avoid paying for mortgage insurance.
Find a home
It’s finally time to shop for your dream home. When looking at a house, put the time in to get familiar with the place. And know that while you’re shopping around, just because you make an offer does not mean you’re committed to buying that home.
Pay attention to the layout and structure of the house. Hire a good home inspector, and ask lots of questions about the property. These are your first line defenses against a bad buy, according to experts. Spending a little more money on help in finding the cracks can save you a lot down the road. Knowing the facts before signing a contract can also help you negotiate a lower price on the property or walk away from thousands of dollars in repairs.
If you find problems with your future house, let the seller know and ask for a discount. The last thing you want is a property with a lot of problems that you didn’t anticipate.
“Educate yourself on the real estate market and read and understand the terms of the contract” says Sarah L. Carson a financial consultant with Fulcrum Financial Group. “Use your head, not your heart.”
Got a money question for Broke No More? Ask us here to be included in a future column.