If you have never purchased a home or if it's been a really long time, you may want to consider these five steps for starters:
1: What type of home do I want and where?
You've been waiting this long, so let's take just a bit longer to identify your goals. Is there a specific area of interest? Maybe it's a certain number of miles from the office, your favorite workout facility or local eatery. We know today's buyer is likely to stay in their first home for somewhere around 10 or more years. Are you planning to start a family there? If so, do you need to be a part of or near a particular school or school system? Ok cool, I think you're understanding more about the question now.
Now that you have ideal location(s) in mind, we need to figure out type. Let's start with the easy one - condo or single family home? In a condo (sometimes it'll be called a townhouse) you're going to pay a monthly association due and it's likely to range from $200-400. This will most likely be to cover outside maintenance of roof, exterior building, lawn maintenance, exterior water, possible facilities like a clubhouse or pool, and more. Again, these are generally the things in your HOA (home owner's association) dues for a condo, NOT always. Once you know whether having that type of rules and regulations as well as proximity to your neighbors is for you or not, we can also discuss style. Is it important to have a ranch (one floor and probably a basement), a house with a first floor master and all other bedrooms upstairs, or preferably 2 floors with basement and all bedrooms on the upper level? And let's not forget that almighty curb appeal. Brick, siding - wood, vinyl, aluminum, landscaping, decks & patios, covered porches, etc. Don't get me wrong, without an unlimited budget, there will be some limited options, but it's important to know what your negotiable and non-negotiable items are before you even start actively looking.
2: How's my credit?
If you're reading this because you're a couple of years away from making the big jump to home ownership, contact us ASAP so we can put you in touch with the right people to set you on a path to financial freedom. No seriously, proper management of your credit is going to open more doors than an Uber driver.
If you're reading this, trying to make sure you have the basics covered, then stay tuned. Now, more than ever, you're able to monitor your credit. Odds are, you're already doing so. You may have a credit card or service that pulls what is considered a soft credit pull every week to update you of score fluctuations and possible identity theft. When you go to buy a home, they will pull from three different credit bureaus and the information and scores may be a little different than what you have been seeing in your weekly reports. Even if you're getting your report from Experian and the mortgage lender uses Experian as one of their three, it will not be identical. Remember, they were pulling soft reports so that your score wasn't adversely affected. Talk to a credit specialist as to what this really means. For now, just know and understand it's possible to be positively or negatively surprised and we all have to play by the lender's rules.
So, have that lender get started with pulling your credit. Let them explain how the pull is going to potentially affect your score and understand without this baseline, we can't start your purchase profile. If something is wrong, we can help get you back on the right track!
3: Is my income steady enough to own my own place?
There are more loan programs than I can begin to describe. Some are geared toward recent grads with medical degrees or teachers, some are not. Tying in to #2 above, your income is a factor. Besides making sure you have the financial independence you desire to have in order to pay your mortgage, utilities, living expenses and hopefully retirement plus fun money, there is something called DTI. It doesn't matter if you're earning $30,000 or $175,000 a year. What matters is how much you actually have after required expenses. Work with a qualified financial planner (oh, we have that too) and then have the lender work out the DTI details once you know YOU'RE comfortable.
4: How much cash do I have to apply toward this purchase?
The traditional mind set is 20% down. However, that is far from the standard nor the requirement in most cases. Let's assume #2 & #3 are covered. Again, you and your financial planner should have a thought in mind regarding how much you personally are comfortable with putting down on a house, keeping in savings, and further investments. This is all personal preference. However, just like before, there may be requirements from your lender for the mortgage. Sometimes you'll need to show you have 2 months of payments in the bank (reserves), sometimes it will be 6 months, and I'm sure there are various other numbers and factors that I don't even know about. The point here is, you could have $100,000 saved but it doesn't mean you can put $100,000 toward your new purchase. Conversely, you could have $10,000 saved and you might have plenty to cover the costs of buying and get approved.
5: Am I ready?
Although 1-4 all starts with you and your personal beliefs and decisions, this one is solely on you. The professionals in your life (financial planner, accountants and/or lawyers, mortgage person, realtor and others) can give you their experiences. Parents, partners, siblings and friends can also give you their experiences and advice. But at some point, you looked in the mirror and said "It's time to be a home owner." So let's give it one more thought. Do you always like the newest thing or technology? Are you a person that loves traveling and has the ability to be gone for days or weeks at a time multiple times a year? Is your job either the type that may move you around a few times or unstable that you may need to look elsewhere? These are all indicators that you may in fact be considering rent rather than own. You can decide what's best. Keep in mind the maintenance that comes with home ownership - cutting lawns, shoveling walk ways, heating/cooling your home, etc.
On the other hand, rent is fairly high for most people and even as interest rates climb, they're historically low. If you were a part of or paying attention in the mid 2000s into the early 2010s, you saw a horrific economic crash. One that was dubbed the Great Recession and rivaled the Great Depression. This is real estate focused, so I'll keep it there. Homes lost tremendous value in Michigan (and other states like Florida, California, Nevada and more). New construction homes were hit even harder in many areas and large builders like Pulte Homes not only moved their offices out of Michigan but completely stopped building. This alone has given second thoughts to many of you, and for good reason. It's true, real estate and the economy is cyclical. However, looking historically, you can see it was almost 100 years from one horrific crash to another one. It was eventually a world-wide problem. Additional historical data will show that owning a home has been people's greatest investments. People that were fortunate enough to buy near the end of the Recession (2011-2013 depending on community) have gained great value in their home. Every year since 2015, your neighbors and friends have been warning you that it's all going to happen again. Some people warned you Obama was ruining America. Some are warning you Trump is ruining America. But the economy, from bipartisan economists, is still rolling and isn't coming to a screeching halt in any foreseeable future. Every January, we think the housing market is going to slow down. It was a warning again this year in 2018. We are now being told 2019 may be just as crazy if not crazier for buyers. Yes, tread cautiously and don't just dive in to the deep end. But with an educated decision on where and what to buy, and without the ability to predict catastrophic events that would totally disrupt the economy, there is no reason to believe you too can't gain additional financial freedom and wealth with what was once considered part of the American dream - home ownership.