Written by Nicolas Allen CFP®
Low interest rates and a desire for more space as COVID-19 leads people to spend more time at home are boosting demand for homeownership. According to the National Association of Realtors, home sales jumped a record 20.7% in June – over a third of which came from first-time home buyers.
If you are one of those people looking to purchase your first home, here are some tips to help you get your finances ready.
Determine your down payment and monthly housing cost. Traditionally, lenders have preferred a down payment of at least 20 percent. If 20 percent or more is possible for your situation, it can be advantageous as you’ll likely reduce the interest you’ll pay and avoid Private Mortgage Insurance (PMI) attached to low-down-payment loans. However, if a large down payment is not suitable for your situation, there are many low-down-payment options available, especially as a first-time buyer, including Federal Housing Administration (FHA) loans and conventional loans. But be aware that a lower down payment usually means you’ll pay a higher interest rate.
You can determine your monthly housing cost by adding the cost of your mortgage payment, taxes and homeowners insurance. You’ll want to look at the total monthly housing cost before purchasing a home to make sure it fits into your overall budget.
Get preapproved for a home loan. With preapproval in hand from a reputable mortgage company, your offer has a better chance of being accepted. Plus, you may be able to shorten the closing period since the loan approval process has been completed. Keep in mind that getting prequalified for a loan is not the same as obtaining preapproval. Prequalification is merely an estimate of how much you may be eligible to borrow based on self-reported income information – it is not a guarantee you will receive a loan. You are still required to undergo an approval process.
Approach fixer-uppers with caution. Unless you are confident the house you’re buying has been deeply discounted based on the current housing prices in your area, you may place yourself at greater financial risk if your new home requires a lot of work. Be realistic about what you can afford in terms of fix ups. If you have the time and know how to retile the bathroom, paint the living room or enhance the landscaping, a moderate fixer-upper could be worth the financial investment. Otherwise, to avoid overextending yourself, you may want to look for a home that is in good shape and will stay that way for the foreseeable future.
Limit your demands. If you want to make a compelling offer, particularly in a strong real estate market, you may want to be selective about the conditions you’re adding to your offer. An inspection contingency is smart but asking for extensive repairs may tip the scales in favor of another buyer who is less demanding.
Do your research so you’re ready to act. Buying a home can be a very emotional decision and it’s important to go into the process well prepared. Take some time to lay out your priorities and research the market. What’s most important to you long-term – resale value, location, school district, number of bedrooms? Be practical about what you can truly afford and take the time to obtain preapproval from your bank or mortgage company. When you start seriously looking, you may have to act fast if you find the perfect house for you. If you’re prepared and thoughtful at the beginning of the process, you’ll be in a better position to make the right move.
Nicolas Allen, CFP® is a Private Wealth Advisor with Ameriprise Financial Services, Inc. in Fresno, CA. He specializes in fee-based financial planning and asset management strategies and has been in practice for 12 years. To contact him, consider http://www.ameripriseadvisors.com/nicolas.j.allen, (559) 490-7030 option 2, or 7433 N. First Street, Suite 102 Fresno, CA 93720.