With the start of the New Year, many people are contemplating a new home. Interest rates are still low. The economy seems to be picking up. But before you make that big leap, follow these 5 tips:
1- Receive pre-approval from your loan officer before you even get into your car and begin house hunting.
Most people request to be “pre-qualified” which is not an in-depth look at your ability to purchase a home. To be pre-qualified you verbally provide information to a loan officer and in a short time period, they give you a guestimate of how much house you may be able to purchase. Information you receive from being pre-qualified can be misleading.
In order to be pre-approved, you provide financial documents to your loan officer. This process takes longer but will provide an in-depth evaluation of your ability to purchase a home. Use the amount you are pre-approved for as the top range of homes you consider buying (i.e., look at homes valued below your pre-approved amount). Additionally, if there are multiple bids on a home you want and you’re already pre-approved, you will be in a better position to win the bid.
2- Understand your loan options and how it will impact your monthly payments.
Ask your loan officer to run a good faith estimate (GFE) with different options for you to evaluate. Many people get caught up with interest rates and points at closing, but those aren’t the numbers to focus on. Instead, focus on how much you need to bring to closing AND how much your monthly payment will be ongoing. The GFE will show you how much you’ll need at closing. Keep in mind if you decide to escrow, the amount for taxes and insurance may be higher at closing than what is shown on your GFE.
Your ongoing payment is important because this amount is what you will be responsible for paying every month. It will impact your cashflow (i.e., if your monthly payment is too high you will have less money to pay for dining out, less money for vacations, less money for shopping – you get the picture).
Ask your loan officer to explain the difference between a Federal Housing Administration (FHA) loan and a conventional loan. If you intend to make a down payment less than 20% of loan value, then you will pay mortgage insurance (additional monthly cost). Your GFE will show your monthly mortgage insurance payment. Keep in mind, lender’s requirements to remove this insurance vary. Also, mortgage insurance can be deductible but it depends on your income level – check with your CPA.
3- Get realistic with your finances.
Make sure your emergency reserve can cover 9 months of your expenses if you are a dual income family. If you are a single income family, then build your emergency reserve to cover 12 months of expenses. When calculating your expenses, include expenses to maintain your new home (e.g., mortgage, homeowners’ association fees, utilities, etc.).
Why do you need to have a large emergency reserve? In the event you lose your job. Other reasons to have a strong emergency reserve are for those unexpected expenses that may occur with a new home – hot water heater busting, leak in your roof, etc.
4- Save money to furnish your home.
If you are buying a significantly larger home than you have now, then you may need to purchase furniture in stages (you’ll be there for a while – you don’t have to buy everything immediately). At a minimum, furnish bedrooms that will be immediately used, kitchen and living room, as well as window shades/curtains. If you will have a yard for the first time, include saving money for a lawnmower and other outdoor tools, as well as patio furniture.
5- Get realistic with your home expectations.
It’s difficult to find that “perfect” home. But you may find a home that is good enough – and with some renovations, can be better. If you plan to have an FHA loan, ask your loan officer about incorporating a “rehab loan”. If you plan to have a conventional loan, then ask about a “home style loan”. While renovations will add more expenses, you can offset it by looking at homes below your pre-approved amount. If you know you will sell your home at some point (most people stay in their home at least 7 years), you’ll have better resale if you are not the most expensive home in your area. Keep that in mind, as you carefully assess whether or not to move forward with a renovation.
With low interest rates, it’s tempting to look for a new home. Before exploring options, get your finances in order so you won’t stress about it later. In this way, you can really enjoy your home.
ABOUT THE AUTHOR:
Niv Persaud, CFP®, CDFA™, CRPC®, is the Founder of Transition Planning & Guidance, LLC. Her firm bridges the gap between financial planning and coaching. As a Transition Consultant, she offers sage advice in all aspects of life – financial, personal and professional. Niv does not manage money and does not sell financial products. She charges an hourly fee on a retained basis. Her services include spending plan development, divorce financial review, life strategy and professional progression. Niv actively gives back to her community through her volunteer efforts. She believes in living life to the fullest by cherishing friendships, enjoying the beauty of nature and laughing often — even at herself. Her favorite quote is by Erma Bombeck, “When I stand before God at the end of my life, I would hope that I would not have a single bit of talent left and could say ‘I used everything you gave me’.”