Buying your first home allows you to put down roots in a community. It is a big decision – both emotionally and financially. The process can be stressful no matter what stage of life, but it is particularly daunting for people in their 20s and 30s who are going about it for the first time. Buying your first house is a key piece of your long-term financial plan. It is likely your home will be your biggest financial asset. TFC wants to ensure you are checking all the boxes to make it as smooth as possible.
Michigan’s real estate market had a tough time during and after the great recession as prices fell from the mid-2000s to the mid-2010s, but real estate values have ticked up in recent years for the most part. Appreciation has been on the order of 3-5% per year of late. The good news for Michiganders is that the cost of an average house in the state is significantly below the national average.
Today’s first-time homebuyer has new challenges. Millennials and even some in Gen X (those in their mid-20s to early 40s) have more debt than prior generations at the same age, so it creates potential cash flow issues once you then take on a mortgage. Once you have settled into your new home, it is helpful to have a plan to tackle that debt while also saving for retirement. But let’s take things one step at a time.
There are a number of steps to take in advance of signing on the dotted line. First, review your personal finances to ensure things are looking good. Strive to achieve enough cash to make a down payment of 20% to avoid having to pay for the extra PMI (private mortgage insurance). Then, review your credit report and score to make sure you will qualify for the lowest interest rate. Next, try to keep your total-debt-to-income ratio below 36%; lenders see a high debt-to-income ratio as a potential red flag.
If you are fortunate enough to have a strong personal financial foundation, you are on your way. What’s next? It may seem out of order but look to get pre-approved for a mortgage. The pre-approval does not bind you to take out a loan, it just helps to speed along the process once you find the right home. Often the best interest rates are not found with the big banks anymore. Look to places like Quicken Loans and Rocket Mortgage or even use a mortgage broker to find the best deal. And a good rule of thumb is not to use more than 90% of your pre-approval loan amount just to be on the safe side in terms of how much debt you are taking on.
The process may seem daunting already – but have no fear, TFC can help provide guidance for your specific situation. Up next you want to research to find the right home. This is often the more enjoyable part of buying your first house. Many people are familiar with Zillow and Redfin, so have fun and poke around on those apps. Look at all the data but also focus on the right areas of a city or community that fit your needs and desires. When you have homed in on an area, now find the right agent. Look for an individual with experience and expertise in your city. He or she will make the paperwork easier for you and help to reduce the stressful nature of the entire procedure.
When you have found that perfect spot, it’s time to negotiate the sales price then lock-in your interest rate. It is likely that a house newly put on the market will not have a very flexible sales price, but if you have found a home that has been listed for more than 4 or 5 weeks, you can probably work the seller down in price by a tidy sum. Once you have agreed to a price, you want to consider your mortgage – the interest rate, how many points, and any closing costs. The real estate agent can help navigate you through those terms.
The entire procedure has more steps than assembling furniture from Ikea, doesn’t it! Let’s press on. Ensure you get an appraiser for your potential home and have a home inspector give his or her thumbs up. You will also need to shop for home insurance. Now you are finally at closing day, and there is a lot of paperwork. Your agent will help you complete the documents in the right order to move things along as efficiently as possible.
Whew! A lot goes into the process of achieving the American Dream. It is a huge step, but all worth it when you move in and settle down in your new house. Your home is a place where you will make memories with family and friends – and that is more important than the financial piece of the picture. Still, TFC is here to help you through the finances and paperwork so you can focus on achieving the dream.
Here’s the point:
- Ensure your finances are in good shape prior to starting the home-buying search.
- Find the right community that fits your desires and life goals in the next 5-10+ years.
- Be patient with the process as there are many steps and boxes to check.
Action Items:
- Monitor your credit report and score in advance of buying a house.
- Work on minimizing your debt-to-income ratio to become more favorable to lenders.
- Talk with us at TFC to discuss your cash flow situation and how owning a home fits within your long-term financial plan.
Image by Rudy and Peter Skitterians from Pixabay