Recently I was asked to send in my top tip for first-time homebuyers to be included in a blog post for Redfin. It was fun to get it back and see what other thoughts the other CFP® professionals offered. Apparently many of us think alike! I don’t agree with everything said here, but it is still a great read for those thinking of taking the plunge into a new home and a mortgage.
First-Time Homebuyer? Here’s How to Prepare FinanciallyAre you thinking of buying your first home? Before you hire a real estate agent or start house hunting, you need to take the time to prepare yourself financially. By improving your finances and educating yourself as much as possible, you can buy your new home with fewer monetary concerns and a positive outlook for the future. Whether a new home is a few years off or you’re already exploring the housing market, use these tips from financial experts to ensure you’re prepared to make the best purchase decision possible. Justin M. Follmer, MBA, AIF®, Coastal Wealth Advisors: To avoid PMI, many homebuyers, especially first-time homebuyers, strive to secure that magic 20% down at all costs. Borrowing from your 401(k) plan may provide that down payment, but it may not be in your best interest over your lifetime. This opportunity cost may be greater than the temporary cost of PMI so it is important to run your numbers and find your break-even points to ensure you’re making the best decision for you and your family. Brad Kingsley, CFP®, Maximize Your Money: While mortgage principal, interest, taxes, and insurance will all be combined into your mortgage payment, don’t forget that there are additional expenses beyond that amount. Expenses often forgotten might include annual heating and cooling system checkups, pest control, exterior maintenance including the yard, and others. Ryan Cole, CFP®, Citrine Capital: Shop around for a low mortgage rate. We recommend that you get loan estimates from at least four lenders. If you use the estimates as a bargaining chip, you can usually get other lenders to beat the estimate by lowering interest rates and/or closing costs. Lowering your mortgage interest rate by even a small percentage can result in tens of thousands of dollars or more over a thirty-year period. Donnie J Carpenter, CFP®, First Move Financial: After making sure your payment estimate includes property taxes and homeowner’s insurance, take the amount that’s an increase over your current rent, and put that money in a high yield savings account for several months. That way you’ll have extra savings for your down payment or to help furnish your new home. William A Liberti, Senior Vice President-Investments, Boston Harbor Group: The primary preparation for first-time homebuyers is to spend less than you earn and to have the excess either yield some return or pay down high-interest debt. This formula will allow debt to be paid down more quickly, and down payments to be accumulated—while also improving credit scores. Your home purchasing power will be determined by your income but will be heavily influenced by your debt load, down payment and credit score. Linda Rogers, CFP®, Planning Within Reach: Before buying your first home, confirm you are on track for retirement, have an adequate emergency fund, and have paid off high-interest debt. Aim for a down payment of at least 20% of the purchase price to avoid mortgage insurance. Use your emergency fund towards the down payment only if you have great job stability, comprehensive insurance coverage, and expect to have positive monthly cash flow after the home purchase. Marci Bair, CFP®, Bair Financial Planning: Work on getting your credit score as high as you can prior to applying for a mortgage which will help you secure a lower interest rate. Don’t over-buy, meaning make sure you still have good cash-flow after your mortgage to pay all your bills and still contribute monthly to your retirement plans and other financial obligations. Jeff Vistica, CFP®, AIF®, Vistica Wealth Advisors: When looking to borrow money for the purchase of a home, be cautious not to place too much emphasis on the ability to deduct mortgage interest. The new tax law has capped mortgage interest on the first $750,000 of home mortgage indebtedness. The new standard deduction in 2019 at $24,400 (for couples) and $12,200 (for single filers) may mean that you don’t have enough in itemized deductions for the mortgage interest deduction to help you any more than the standard deduction would. Reid Abedeen, Managing Partner, Safeguard Investment Advisory Group: Three things to consider that will help you now and in the long run are to first create a spreadsheet. Itemize and calculate the amount you are able to afford by outlining your monthly costs to see where you can trim your expenses. Second, compare mortgage rates in order to keep your payments as low as possible. Lastly, be patient. Remember, Rome was not built in a day, and neither will your overall wealth. By saving consistently, and contributing to your 401K, not only will you have the opportunity to purchase your first home, but perhaps additional income-generating real estate in the future. John Dameron, RICP®, CLTC, Spaugh Dameron Tenny: Prior to looking at homes and possibly falling in love with one that is out of your price range, there is a key step to take. Before house shopping, determine how much house you can afford based on all your goals. Knowing the big picture will allow you to align the purchase of your new home with your budget. Ben Wacek, CFP®, Wacek Financial Planning: Don’t buy a house unless you’re in a solid financial situation to do so. Even if you get a great deal and a great interest rate, if you cannot afford the mortgage payments or don’t have enough margin in your budget to cover the extra expenses that inevitably come up, you will regret buying the house. Adam D. Van Wie, CFP®, VanWie Financial: The most frequent mistake our clients make when buying a new home is underestimating the costs associated with owning a home. When you rent, repairs and maintenance are taken care of by the property owner. When you own, you are responsible for everything, and those costs can add up. The easy things to budget for are monthly costs which can include lawn care, pool care, and pest control. The difficult things to budget for are one-time items that seem to come up every few months. This can include plumbing or electrical issues. Other things that can be hard to budget for include appliances failing, a new roof or air conditioner, or even as something as simple as a ceiling fan needing to be replaced. Be sure to include “home repair costs” as a monthly item in your budget to cover these items, and consider putting aside money for a new roof in a savings account every month. Roger Ma, CFP®, lifelaidout: I ask my clients three questions to better understand whether they should buy or rent: 1) Can you buy? 2) Should you buy? 3) Do you want to buy? “Can you buy” deals with whether you have sufficient upfront and ongoing cash to purchase a home, meaning at least enough saved up for a 20% down payment, closing costs, and have money left over for a three to six-month emergency fund after. “Should you buy” gets at whether you plan to stay in the home for at least five to seven years (and if not, rent!). “Do you want to buy” addresses reviewing all of your financial goals and determining whether it makes sense to devote your savings to a home purchase or your other financial goals. John A. Kvale CFA, CFP®, J.K. Financial Inc. and Street-Cents: One of the most important things to remember is buying a home is likely going to cost more and take longer than you initially think. So have extra emergency funds set aside and be sure to wear your patience hat. Patrick King, CFP®, Transformative Financial: In that moment after all the due-diligence and before signing the contract, take a quiet moment to listen for the voice of your intuition. Does this feel right? The biggest financial mistake you can make is spending all that time and money buying a house that will never really feel like home. Rachel Songer, CFP®, Keener Financial Planning: We recommend that you have a good handle on where your money is going today. From here, forecast out what the expenses associated with the house will look like: mortgage payment, taxes, insurance, maintenance, and utilities. Once you have determined a comfortable budget, start looking for houses that will work within those parameters. Lia Bertelson, CFP®, Together Planning: When you are setting a budget for buying a house, don’t forget to factor in maintenance and repairs. Hopefully, your new home was left in tip-top shape by the previous owners, but sooner or later something will break. Make sure you will be able to afford those surprises. Josh Scandlen, CFP®, Heritage Wealth Planning: Do whatever you can to keep a cash reserve on the side. Do not liquidate all your savings in order to make the largest down payment possible. There’s a good chance you’ll need funds for unforeseen future expenses. We do not want you to go into debt to pay those. Jon Howard, Advisor, SeaCure Advisors: For most people, your first home will not be your last and your loan, which is collateralized by the home, will likely be the cheapest money you’ll ever borrow. The money you put into your house is very difficult to access if there is a financial emergency and does not accrue any interest. Make sure you do a careful budget and cash flow analysis and strike a balance between maintaining your required reserves of liquid money, which may require a low down payment, and having an affordable monthly bill, which may require a higher down payment. David Ragland, CEO, IRC Wealth: The first step is to sit down and review what you have spent on average over the last 30 and 90 days and to categorize your purchases. The biggest thing we see with people when we look at their spending patterns is that oftentimes they didn’t realize how much they spent in certain categories. Being mindful of how you spend allows you to make better purchasing decisions. Jim Marrocco, CFA, CFP®, Thinking Big Financial, Inc.: Look at what your cash flow will look like each year after the proposed purchase closes. Do you still have the flexibility to live the way you want to? Are you sacrificing saving? You want to make sure you can still do all the other things in life that are important to you and own the home at the same time. Andy Hill, Marriage, Kids and Money: It’s important not to forget the cost of furnishing and updating your new home. When I bought my first house, the only thing I was worried about was whether I could afford the mortgage payment. After I needed to repair my HVAC unit, replace my roof and furnish my entire home, I quickly realized that the mortgage is only one piece of the home ownership puzzle. Sophia Bera, CFP®, Gen Y Planning: Make sure you’re on track with your other financial goals before diving into your first home purchase: pay off any high interest rate debt, clean up your credit, build up at least 3 months of emergency savings, and make sure you’re prioritizing saving for retirement. A solid financial foundation is key before taking on a mortgage payment. Tyson Koska, CEO, OnTrajectory.com: Key to purchasing your first home is knowing exactly ‘how much home’ to buy. Do not simply buy whatever you get approved for, but consider how your mortgage may impact other parts of your financial life — such as your ability to make 401k, 529 or HSA contributions. Tools like OnTrajectory are designed to make those impacts clear. Jared Hoole, CFP®, Lakeside Financial Planning: You should be purchasing a home that costs no more than 3.5x your gross salary. Ideally, you should purchase a home that is 2x – 3x your gross household income. Kristi Sullivan, CFP®, Sullivan Financial Planning: Set aside an additional 2%-3% of the purchase price for unknown expenses as you move in. There is always something you will want/need to take care of right away (plumbing leak, wallpaper removal, window blinds, landscaping, cracked concrete) in a new house. Michelle J. Gessner, MSM, CFBS, LUTCF, CFP®, Gessner Wealth Strategies: The key to saving enough money to buy your first home is to religiously pay yourself first from every paycheck, as though you are paying any other bill. The best way to do it is to use the automatic transfer feature available in your bank to move the money to a savings account at the same time your paycheck arrives before you see the paycheck deposit. Then, when you have saved at least 20% of the purchase price which is typically the down payment needed to avoid PMI, you are ready to go. Al Procaccino, CFF®, CFP®, CFS®, Castle Financial: It is wise to set up sinking funds to put aside and invest money for future expenses like a pool, extension, back yard patio, etc. In addition, considering the needs of a growing family and not just for more children than anticipated. Elderly parents moving in with the children for example. Jeff Hohman, Emerge Financial Services: Oftentimes, when people are preparing to purchase their first home, and they have a less-than-perfect credit history, they want to start by paying off collections accounts. This can actually hurt your credit score, sometimes lowering it 30-40 points. It best to start by talking with a mortgage expert; they will assist you in creating a plan to reach the dream of homeownership. White Rhino Financial: Property taxes are something only other people complain about — until you become a homeowner. So, earn your right to complain by doing your homework! Before buying a home, use a property tax calculator online to help you estimate your tax bill. Let’s say it’s $5,500. Divide that by 12 and make a monthly contribution of $458 to a separate tax savings account, so you’re prepared when the tax bill comes due at the end of the year. Timothy J. Watters, CFP®, Watters Financial Services: The hardest part of getting a home is building your down payment. Three ways to do this:
- Set up an online savings account and set an automatic payment each month. This will also help you to see if you can afford to spend more on a mortgage
- Borrow from your 401k. You can borrow 50% up to $50,000.
- Get a gift or loan from a family member. Gifts do not count against you for mortgage affordability rules but a loan does.
Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations may vary. Therefore, this information should be relied upon when coordinated with individual professional advice.