Are You Ready To Buy A Home?
Purchasing a home is one of the most important decisions in your life. There are so many factors to consider including the growth of your family. It’s quite tempting to take advantage of the low interest rates in the market right now and every home looks like they're straight out of an HGTV magazine. Putting all the glitz and glamour aside, here are several things you need to have in order to get the best home for you.
Good Credit
Credit score ranges from 300 to 850. It ranges from poor to exceptional. The higher the credit the better your loan terms will be. To qualify for a home loan you at least need a 580. There are some programs that allow for a lower credit score but the monthly payments are out of the water. Lenders look at what is called a credit profile. This means more than just your credit card debt. Your credit profile pretty says how well you manage debt. The profile consists of payment history, amount of debt, credit history length, amount of new credit, credit mix and resilience. There are plenty of apps to help you monitor your credit. The sweet spot range is 620+. Do bear in mind that credit fluctuates and not everybody reports at the same time. To look at your full credit profile you can contact each reporting institution: Equifax, Transunion and Experian separately or go to www.myfreecreditreport.com. Both are encouraged. Something may show up on one report yet not the other. You may have to dispute errors on your credit report which may take 30-60 days to correct. Be sure to keep your credit utilization between 10-40% to qualify for down payment assistance programs. Having a full picture of your credit allows you to evaluate your preparedness to purchase. If your credit is low, build a financial plan to help you reach your goal.
Income
While your lender is reviewing your credit, they are also looking at your income. This is a major basis of your loan pre-approval amount. A good rule of thumb is take your tax returns and multiply it by three. They look at two years of tax returns and bank statements to get a good idea of your income stability. They do not count PPP loans or unemployment as income because those occurrences are sporadic and will end after a period of time. In other words, it's temporary. That money can age in your account as reserves after a while but initially it can not and should not be counted as income. We all love cash but having that stashed outside of some type of regulated banking institution does not translate well in the modern world. Sure it looks cool to have a literal bag of money at your disposal but unless it’s in a bank account they do not count it and it’s often misinterpreted as ill-gotten because it’s not traceable. Today, you often hear about multiple streams of income. That can be having two wage earners in the household or having several profitable businesses. Either way, having this gives you better control over your budget and more opportunities to save. Also, it is not true that entrepreneurs can’t purchase a home. They take your Schedule C instead of W-2s. It’s only difficult because many new business owners write off so much in order to pay less taxes at the end. So yes, if your business is only saying it makes $30,000 you're going to get a low pre-approval amount. Whether you’re a business owner or not having a stable income is important. The next step is having a budget plan in place on how you are going to use that income to get what you want out of life.
The Budget
Household budgeting is often overlooked. Many of us are so used to spending our money as fast as you make it. This causes life to become a stagnant routine of wake up, go to work and pay bills. Repeat. Budgeting takes into account how much money you are bringing in, all of your expenses (necessities) and savings for future goals. Over the last few decades, people are stuck in a rut because the price of goods have increased, but the minimum wage hasn’t. Writing everything down in terms of what you bring in to what you spend can be an eye opener. Do you really need to buy a venti mocha frap every morning from Starbucks? Or could you sacrifice a few trips even saving on gas. Looking at everything laid out on the table you’ll see where you can cut back or may even come up with additional ways to bring home more income. Think of running your household as a business. You go to work to make money. You can either use that money to pay off a lot of debt after expenses or you can use that money to invest in more opportunities to get more money. The latter is a well run household because it can expand meaning you can go on that dream vacation, pursue an extra degree or purchase a home. Whatever the case, it's financially healthy to have left over money. This rolls over into the next month like the 90’s rollover minutes and becomes your reserves.
Reserves
Financial healthy households have several months, sometimes even years, of reserves. Reserves are an excess of money set aside for a specific reason. This is different from savings and disposable income which should be budgeted. It generally mirrors monthly expenses so that in the event you lose your job, become ill or injured you are able to use this account to keep all of your bills paid while you recover. It replaces your income for however long you were able to set up. Some people have no reserves causing them to go into panic mode or stress more because they have no income. This is a dangerous position to be in. Three months of reserves is recommended. It is also best practice to set up a portion of your reserves as an emergency fund outside of monthly expenses. This can account for drastic things like unforeseen car repairs or insurance deductibles (medial, home or car accidents). Putting this money back as soon as possible keeps reserves intact. Also, if you are spending out of the same account it’s not a reserve. Lenders will look at your reserves to determine your ability to keep paying in case of economic factors out of your control. This is called your resilience.
Savings
Dreams do come true if you save. Well, mostly. I remember wanting a new video game when I was younger or a new toy. It wasn’t around my birthday or Christmas so I took an orange bead box and placed all the loose change I could find in those tiny square boxes in sums of dollars. If I filled up all 24 boxes I’d have 24 dollars. Then I would take that to the coin machine to turn into actual dollars to present to my mom. We’d then schedule a time to go to Walmart to purchase the videogame. This was the same for toys and shoes. That’s what saving is- having a goal in mind, figuring out how much you need to get it and putting together a plan. When purchasing a home that goal is the down payment and the loan costs. Depending on your market you’d need to save anywhere from $10,000 to $60,000 or anywhere from 10-30% of purchase price in addition to closing costs. You want to talk with your lender about what you’d need for the type of house you want. Many times they will count your reserves as savings as being able to pay to close because it is. However, this is not a safe strategy in the event you lose your job after purchasing and so forth as mentioned before. That is why you want to have another account altogether designated for reserves and savings separately.
Once you have a good handle on your credit, household budget, income and a healthy build up of savings and reserves you are prepared to have a discussion about purchasing a home. I see too often people are using their last to purchase a home only to be foreclosed on years later because they didn’t understand how to budget and maintain a household financially. In other cases, homes fall into desperate need of repair because the owner couldn’t spare income to pay for home maintenance. This in turn takes a toll on their health- mentally, physically and financially. Owning a home is supposed to be a beautiful experience where you shelter your family and create memories. As a realtor, I have to ask- are you ready to buy a house?
