Part 2: Homeownership... To Buy or Not to Buy?

     In our last post, we explored the basics of getting started in the process of homeownership. We’ve estimated how much your dream home will cost by using mortgage calculators such as BankRate, and we’ve also taken some time to review your credit report and make any necessary changes. Based on the information you discovered, you might be rethinking your plans entirely. You might decide that you are completely comfortable with your estimated mortgage payment and look for a more attractive home with a larger price. Alternatively, your new perspective with an estimated monthly mortgage payment may convince you to stick with renting for another year or two.

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     If you’ve gotten this far, congratulations! You are well on your way! But before you go online or to your bank to fill out an application for a mortgage, take some time to talk to some of your friends and family about homeownership. Ask them about the process. Do they have recommendations for a realtor or mortgage loan officer?  Is there anything they would have done differently? Was there a step in the process that they felt unprepared for? Their experiences may not apply to your situation, but their information is nonetheless helpful in navigating your home purchase process.

     I strongly recommend that you practice having a mortgage. If expect to take on a mortgage with a $1000 monthly payment, then “pay” your mortgage by tucking it away in your savings account. What impact does that have on the rest of your budget? Are you comfortable? Do you still have the ability to save, pay off existing debt, and spend money on things you enjoy? What do you have to give up in order to make that $1000 payment?

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     At this point you are ready to obtain a pre-approved mortgage. A pre-approved mortgage is basically a promise from a lender that you qualify to borrow up to a certain amount of money at a specific interest rate. This promise is subject to a number of conditions, but allows you to see how much the lender has evaluated that you can afford. Keep in mind the following:

1.) Each application can cause a small drop in your credit score, so apply with moderation. Use referrals from your friends and family. Did they have particularly good or bad experiences with a particular lender?

 2.)Remember, lenders are in the business to issue loans and make money on the interest. Your pre-approval is for the maximum amount you could potentially borrow. This does NOT mean this is what you can afford. You don’t want to become “house poor,” where you have an amazing home, but not enough income for anything else!  

     Many individuals ask, “How much home can I afford?” Like we said earlier, “it depends,” but a general rule is roughly 25%-33% of your gross income. Make sure you are including the cost of your homeowners insurance, real estate taxes, and HOA fees in addition to your mortgage repayment cost. It is also a good idea to factor in an annual housing maintenance budget into that percentage, generally 1-3% of the purchase price. So a $150,000 home would have an annual maintenance cost of $1500, or $125 a month.

Homeownership...To Buy or Not to Buy?

 I’m going through that stage in life when more and more of my peers from high school and college are “settling down,” as we so commonly say. They’ve navigated through their student loan payments and college credit card debt, and landed a secure job.  Now they ask me…Emily, can I buy a home How do I get started? How much house can I afford?

      We will tackle this subject in a few parts to break things down. Hopefully these thoughts can help!

       CAN I BUY A HOME? The answer to this, and many other questions in personal finance is almost always, “it depends” because of the plethora of variables that make the answer “yes” or “no.” While all mortgage underwriting guidelines are different, if you’ve had the opportunity to build a solid credit history and have sufficient income to support a mortgage, YES you probably can!

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           Many clients ask me, “How do I get started?” If you are asking me, you’ve probably done some exploring in the area you dream of buying a home. You’ve also probably taken a quick inventory of the cost of those homes. Now, take the average price of those homes and use a mortgage calculator. I recommend starting with a mortgage calculator, like BankRate. This will allow prospective homeowners to get an idea of what interest rates look like, as well as their principal and interest payment. At this point you may be ready to sign on the dotted line or rocking back and forth in the fetal position. Take a breath, and keep in mind these calculations do NOT factor in- taxes, homeowners insurance, and PMI (if necessary).

          Now that you’ve got an idea of what your dream home will cost you, I recommend you take a look at your credit report to look at how your credit stacks up. Please, please do not get sucked into one of the credit monitoring “services” out there. If the site requires a credit card, leave the site entirely. In fact, the ONLY place to review your credit report according to the FDIC is www.annualcreditreport.com or call 1-877-322-8228. Here, you can request a free credit report disclosure (available every 12 months) from each of the three major credit bureaus- Equifax, Experian, and TransUnion. Read your report carefully, and ask your financial planner to take a look with you.  Pay close attention to “factors negatively impacting your score.” That will give you an idea of what action you can take to improve your overall credit score and report, which may very well in turn pay off with a lower interest rate on your mortgage.

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                 Stay tuned! We will be back with MORE helpful tips and answers with Part 2 of “Homeownership… To Buy or Not to Buy?”

What is a CFP® and Why Choose One?

"CFP" is the trademarked, official designation for those who have earned designation as a Certified Financial Planner.  To earn this designation, a financial advisor must meet various certification requirements.  This includes passing a challenging, 2-day examination that covers all the elements of financial planning, and at least two years of experience working in the field of financial planning.  To maintain CFP® designation, an advisor must meet annual continuing education requirements and satisfy the CFP Board's rigorous ethical standards.

Why choose a financial advisor with the CFP® designation?

Scary news for individuals and families seeking financial advice: anyone can set up shop as a financial advisor.  Advisors who have earned the CFP® designation, however, have received comprehensive education and training in financial planning.  By passing the CFP® Board's examination and experience requirements, the CFP® designee proves her understanding of all of the elements of financial planning.  The CFP® designee has also committed herself to a high level of ethical practice.



For more info on the CFP Board, visit CFP.net.