It is no secret that the housing market has been challenging for first-time homebuyers recently. High mortgage rates, rising prices and limited inventory can sometimes feel like impossible challenges to overcome. However, there are some steps you can take to help make your dream of homeownership a reality. The following tips can help.
#1 – Do your research.
One of the keys to homebuying success is to become an informed buyer. Before jumping in, take time to research your local housing market, any neighborhoods you may be interested in, school districts (if you have or plan to have children) and recent sales in your desired area(s). Become informed about recent home prices, days on the market, inventory levels and sale-to-list price ratios. Arming yourself with this knowledge can help you move quickly when the right house comes on the market.
It is also important to consider whether home ownership is right for you during this particular stage in your life. For example, if you do not plan to live in the home for at least five years, it may not make financial sense to purchase a house until you have found a more permanent location.
Finally, it is important to consider whether you are willing to give up a certain amount of lifestyle flexibility in order to purchase a home. You may need to make sacrifices in other areas of your life in order to free up enough money and time to invest in a house. Sometimes it makes sense to rent for a period of time prior to committing to a home purchase.
#2 – Get your finances in order.
Purchasing a home is one of the biggest financial obligations you are likely to take on in your life, which is why it is important to get your financial ducks in a row prior to making an offer. Consider the following:
- Credit score –Your credit score impacts your mortgage rate, which can have a significant impact on how much interest you will pay over the life of your mortgage. If your credit score could use some improvement, take time to establish (and follow!) a budget, pay down debt and pay all bills on time.
- Down payment – One of the best ways to present a strong offer is by having an adequate down payment on hand. Ideally, you will have saved at least 20% of the home’s purchase price as a down payment. If you put down less than 20%, you may need to pay for private mortgage insurance (PMI) and other fees.
- Earnest money – It is important to be aware that you may be required to put down earnest money at the time you make an offer. An earnest deposit is typically 1% to 3% of the purchase price. This money demonstrates that you are committed to purchasing the home. It is held in an escrow account until your home purchase is complete, at which point it is applied toward your down payment or closing costs.
- Closing costs –When you close on your home purchase, you will need to pay certain closing costs, such as lender fees, appraisal fees, transfer taxes and title insurance. Closing costs typically range from 2% to 5% of your home’s purchase price.
- Documents – You will need to gather all relevant financial documents, such as pay stubs, bank statements, tax returns, credit reports, proof of employment, identification, etc.
#3 – Determine how much house you can afford.
Before you start looking at houses, it is important to have an idea of what you can reasonably afford to pay each month. Consider the following factors:
- Household income
- Monthly debt obligations
- Savings
- Future goals
- Down payment and other expenses (as noted in #2 above)
- Credit score (as noted in #2 above)
It is also important to understand how your debt-to-income (DTI) ratio impacts the amount of money you can borrow. The DTI ratio compares your potential monthly debt (i.e., mortgage payment, homeowners insurance, property tax, etc., plus existing debt obligations) to your income to determine how the two compare. Ideally, your debt and other housing expenses should not exceed 28% of your monthly income.
Fortunately, there are a number of online calculators that can help you gain an understanding of how much house you can afford.
In addition to the purchase price and closing costs, you will also need to consider the ongoing expenses that come with homeownership, such as maintenance, property taxes, insurance, unexpected repairs, etc. Taking time to understand and estimate these expenses upfront can prevent you from getting in over your head.
#4 – Enlist the help of a qualified real estate professional.
Navigating the home buying process can be overwhelming, especially for first-time homebuyers. That is why it is often wise to enlist the help of a qualified real estate professional. Your real estate agent can provide valuable insight into the local housing market and identify properties that meet your budget and search criteria. He/she can also negotiate a deal on your behalf and coordinate the contract process.
When deciding on a real estate agent, do your research. Ask friends and family members for referrals, and make sure you are working with a professional who has a proven track record, applicable credentials and experience working in your local market.
#5 – Determine your funding sources.
A home purchase is a big financial commitment. How do you plan on paying for it? Have you considered using family money as a source of funding to help with the down payment? Will you apply for a home mortgage? These are important considerations to work out before you make an offer.
If you have family members who have expressed an interest in providing financial support, there are several ways they can help, including:
- Gifting using the annual gift tax exclusion –In 2024, the IRS permits annual gifts of $18,000 per person, per recipient. This means if your parents are married and wish to help with your down payment, they can both give you $18,000 without paying taxes on the gift. That is a total of $36,000 to put toward your home purchase.
- Private loan –Another option is for a family member to issue you a private loan, which can save you money compared to a traditional mortgage. The IRS publishes a monthly applicable federal rate (AFR), which is the lowest rate at which money can be loaned between related parties without being treated as a gift. Your financial advisor can help you structure the loan to avoid any potential gift tax implications.
If you plan to apply for a mortgage to fund your home purchase, make sure to take time to research potential lenders. Your real estate agent can offer advice to help you identify lenders with experience working with buyers in similar situations.
It is also important to get pre-approved for a mortgage. There is a difference between being pre-qualified and pre-approved. Pre-qualification offers you a rough estimate of how much you may be able to borrow. In contrast, pre-approval is a more in-depth process where the lender reviews all your financial information to determine both the amount you can be approved for and your applicable interest rate. Being pre-approved, rather than pre-qualified, gives you a better understanding of what you can afford and allows you to present a more competitive offer once you find the right house. Could you use some help preparing to purchase a home? We would love to have a conversation. To learn more about how United Capital can help you plan for the future, please contact us.
