My 27-year-old son, Zach, just bought his first house. Standing on his front porch filled my heart with such pride and a flood of memories came to mind. I was raised by a single mom who didn’t purchase her first home until she was almost 50. As a young adult, I wanted to do better; I didn’t want to rent my entire life. Once I became pregnant with Zach, his dad and I bought our first home. Our finances were not great, nor was our credit. We were lucky the people that we bought our first home from trusted us, because I was a teacher. We were able to assume their loan and make balloon payments. It was a rough first year. At times, we had to borrow money to keep the electricity on. We didn’t have family or friends to offer advice on making a home purchase. You always want your kids to do better than what you did. You want a better life for them. This day was a celebration for me, too. My son is doing better than the previous generations. So, what did I do to help my son with his first home purchase? Well, I didn’t give him money, but instead I gave him sound advice that he followed. The best and most important advice was just WAIT! Wait until the time is right emotionally and financially.
Your home should be a blessing and a peaceful sanctuary. When you are strapped for cash, your home will be a place of stress; it will become a burden, not a blessing.
There are many factors you need to consider when a purchasing a home. Take the time to save and position yourself with enough knowledge about the housing market, loans, the area where you want to live, and the cost of home ownership. Start educating yourself. Many of Zach’s friends and family already purchased a home, so he had a wealth of first-hand knowledge to collect. Of course, parents can also be a wealth of knowledge and we had more specific advice for him to follow.
Pay Off All Your Debt First and Contribute to Your Retirement.
He purchased a truck six months after graduation. After paying that off, he had no additional debt. Having no payments allowed him to start saving cash for a home purchase, while contributing to his retirement. This should not be an either-or situation. You must make the most of your compounding years. If you invested $479 monthly with a 9% return over 11 years, you would have just over $100,000! I am not an investment adviser, but that number excites me. So, don’t choose one or the other, just wait until you can do both.
Have a 3-6 month Emergency Fund
Being single, Zach saved six months of expenses in a savings account. Most home repairs can run between $2000 to $6000. You will have to decide the amount of savings based on your financial situation. However, I highly recommend having at least $6,000 to cover any unexpected home repairs or other emergencies that may come your way. And there is a high likelihood that an emergency will come your way.
Write a new budget based on home ownership
Your expenses will change; therefore, your budget will need to be adjusted. Maybe your utilities bill will go up or your mortgage will be higher than your rent, or you may need to add HOA fees. Knowing your budget will give you a realistic picture on how much house you want to purchase. Ask yourself, how much money do you want to have at the end of each month to put towards other purchases or financial goals? It is not a question of what you can afford, but instead how much of your money do you want to keep for other things you value in life. Your new mortgage should not exceed more than ¼ or 25% of your take home pay.
Save 10-20% for the down payment
The golden plan is to save 20% for the down payment on a house. Yet, sometimes that is not realistic, so attempt to get as close as possible to the golden rule and fully understand what it will cost if you are under the 20% down. Using an online calculator, mortgagecaluclator.org, Zach landed on a 10% down payment. It will cost him more because he will need to pay for mortgage insurance. What is mortgage insurance? It is an insurance policy which compensates the lender, not the borrower, for losses due to the default of a mortgage loan. The cost of adding the mortgage insurance for a limited time was not a significant amount. Zach decided on the 10% with a budget in place that he can make additional payments in the first year to reduce the amount of time that he will need to have the mortgage insurance. Once the 20% has been paid, a homeowner may cancel the insurance. Awareness and doing the math here is important to make the best decision for yourself.
Hire the Best Professionals
You should interview multiple loan officers and realtors. Zach did not follow my exact advice here. I gave him two loan officers to consider: Justin Toenjes, of Peoples Mortgage and Sergio Moncada, of One Trust Home Loans. He went with his best friend, Sergio. But then again, what are friends for? I gave him two realtors: Heather Rodriguez of Coldwell Banker and Megan Huff of Realty Executives. I have spent time interviewing and getting to know these professionals and I trust all four to serve my clients and my own child well. If you live in the valley and are making a home purchase, interview all four of these professionals to help you. If you live outside the valley the loan officers, Justin Toenjes and Sergio Moncada are licensed to process loans in multiple states. I truly trust these professionals to make your home buying experience a positive one.
Stick to Your Purchase Price Ceiling
Using https://www.mortgagecalculator.org/ , determine how much house can fit into your budget. Your payment needs to be at or less than 25% of your take home pay. It is easy to be tempted to increase your ceiling after seeing a couple houses in your price range and you haven’t seen the ideal house yet. You most likely will be approved for a higher amount on the loan than your ceiling price, so it is even more tempting to go beyond your ceiling. stick to your ceiling! My son did and two weeks later he found the right home. Just wait - the right house will be found. Remember, you want your home to be a blessing and not have to worry about making the payments. You will want a bucket of cash for move-in home purchases. These can get crazy out of control quickly. Make a list of all anticipated expenses, include: moving expenses, appliances, furniture, repairs or upgrades, window coverings, painting, and just some fun items. It is reasonable to expect to spend an additional $5000-$8000 on these items.
Know exactly how much the home will cost over the lifetime of loan
Calculate the total price of your home. We are trained in our culture to think in terms of the monthly payment instead of the total cost of our purchases. I want you to do both - consider the monthly payment and know the total cost. Knowing the total cost will keep you in check and motivate you to keep costs down. To become financially aware, you need to know the total cost. Knowing this will help you to make better overall financial decisions. This will also keep you in check from adding $10,000 or more to purchasing more home.
Get a 15-Year Bi-Monthly Loan
This is simple. Compare scenarios on the mortgage calculator to see how much you will be saving. A bi-monthly payment splits the monthly payment in half and you make payments every 2 weeks for 16 half payments which in a year equals 13 monthly payments vs. 12 monthly payments. Not planning on staying in the home? You will build more equity that will be yours for your next home purchase. With a bi-monthly payment you will automatically make 1 additional payment per year, saving you thousands in interest.
Go with mom to buy the house warming gift
Moms love spending time with their children; just because you are an adult doesn’t change that fact. Zach and I spent a couple of hours shopping. The best buy was at Pottery Barn. We bought single dishes instead of a whole set. He didn’t want mugs and small plates; therefore, it didn’t make sense to purchase a 32-piece set. We ended up purchasing 8 dinner plates and 8 bowls, exactly what he needed for $90. It was a wonderful day spending time with my son and buying items for his home that will last a very long time. Money well spent.
His home is a blessing! Thank goodness!