Hopeful to Homeowner Part 1: Start With the (Financial) Basics
Editor’s Note: In this three-part series on buying a first home, we’ll explore how to beef up on your financial literacy, review your credit report through the eyes of a lender, and negotiate the best deal on a home mortgage.
Homeownership comes with plenty of perks: It lets you put down roots, invest in your own future, and it can pay off at income tax time.
But as any homebuyer knows, there are costs you can anticipate: your monthly mortgage or homeowners association fees, for example. There are also unexpected costs — like paying for repairs to that leaking pipe or buying new appliances.
“There are realities to owning a home you didn’t have as a renter, so you’ll need to be sure you’re ready,” says Bruce McClary, a certified financial educator and government relations/public policy manager at ClearPoint Credit Counseling Solutions.
The goal, says McClary, is “positive cash flow,” so your income covers expenses, builds your savings, and leaves some breathing room. You may need to set up a monthly budget and curb your desire to overspend. Pay down credit card debt and put aside some savings each month. “Trying to juggle a mortgage payment along with numerous credit card bills is asking for trouble,” he says.
A Dash of Reality
Before going house hunting — even online — young buyers should understand how lenders will view their credit and all the costs of homeownership, says Annehanna Merritt, a residential real estate agent with Coldwell Banker in Columbus, GA.
Lenders generally follow the 28/36 rule, she notes. No more than 28 percent of your monthly gross income should go toward your mortgage payment, taxes, and insurance, while your total debt (which includes credit cards, auto loans, etc.) should not exceed 36 percent of your total gross income. (Calculate your debt-to-income ratio.)
There’s also “purchase power” versus “purchase comfort zone,” says Eric Broermann, a real estate agent with McWilliams Ballard, Inc. in Alexandria, VA. “You should be comfortable with the loan amount and not feel it’s a burden that prevents you from paying for other things.”
Improving Your Financial I.Q.
If you’re like many young adults unable to pass a basic financial literacy quiz, you may need a crash course. “We have basically one semester-long course in high school — and not all states have even that much. I can’t think of any single subject that is learned in one semester at the end of high school. We don’t learn math or history or English this way, because that’s not how an important topic is learned,” Annamaria Lusardi, a professor and academic director of George Washington University’s Global Financial Literacy Excellence Center, recently told GW Magazine.
If your school skipped the basics, the Consumer Financial Protection Bureau, the Federal Reserve, or the Financial Literacy and Education Commission can help you catch up. Many lenders offer in-person workshops and online courses, as do some employers. In addition, smart phone apps like Mint and Manilla can help you track money flow and set up your budget, says LaTisha Styles, founder of YoungFinances.com.
Need (Free) Help?
Even if you’ve set up a budget and your financials look promising, you may benefit from pre-purchase advice from a housing counseling agency approved by the U.S. Department of Housing and Urban Development (HUD). These agencies offer free or low-cost help and evaluate your finances to determine how much house you can comfortably afford, says Christopher Brooks, vice president of Tampa Bay Community Development Corporation (CDC), part of NeighborWorks® America.
They can also help first-time homebuyers understand financial products that offer low down payments (typically 3 to 5 percent) and locate down payment assistance from state or local agencies.
Understand Your Goals
With young adults 18 to 33 representing 60 percent of first-time homebuyers, and more likely than any other group to purchase a home in the next year, real estate pros are tuned into their needs.
Scott Bird, a real estate broker with Stratum Real Estate Group in Cedar City, UT, starts by asking young buyers questions about their finances and reasons for wanting to buy. Their goals may differ from those of past generations. Says Bird: “They may not be ready to start a family. They’re sometimes tired of paying rent and want their money to work harder for them.”
Former renter David Hunter, a 29-year-old program analyst, recently purchased a five-bedroom home in Haymarket, VA. He occupies the master bedroom and rents out the others. “I was ready to put down some roots, and this home’s a great investment,” he says.