Tom Presley, CPA, CFP®, PFS | Wealth Advisor
With many of us spending much of the last twelve months under some degree of “house arrest” through the COVID-19 pandemic, residential real estate is largely booming. This is due to many people now wanting larger and newer spaces to live in, mortgage interest rates being near all-time lows, and the fact that many people have been able to save up a little extra cash due to much less busy social calendars than normal. While it may be a really tempting time to buy your first house, a bigger house, or that vacation home you’ve always wanted, these are 7 things you should really consider:
Determine how much house you can afford and don’t budge (at least not upward)! How much income do you have coming in every month? How much do you have going out in expenses every month? If you buy a house or another house, what will change? Chances are between mortgage payments, real estate taxes, homeowner’s insurance, utilities, and HOA fees, expenses may be rising, and to succeed financially, you will have to keep spending less than you make. You probably also want to err on the side of buying less house than you think you can afford because there are other costs associated with buying a home such as closing costs, moving expenses, and new furnishings. I’ve never met a homeowner who said buying/owning a home was less expensive than they thought it would be!
Make sure your credit scores are in order and try to live as boring and normal of a financial life as possible 2-3 months before you start the lending process. Check your credit reports with the three major credit bureaus and make sure everything is as it should be before you start looking into financing options. And if the time comes for mortgage underwriting, you are going to be asked for the details on your assets, liabilities, and cash flow, so if you can, try to live as boring and normal of a financial life as possible for a few months before you start the lending process. Certainly, go ahead and do what you need to do and live your life, but from a strictly smooth and painless underwriting approval perspective, it’s probably not the time for unusual amounts of income or one-off expenses to hit your financial records if you can avoid it. For instance, if you are planning to buy a house and car, it is probably better to buy the house first.
Get prequalified for a mortgage. This doesn’t take a lot of effort and can give you some additional confidence that a bank or lending institution is on a similar page with you as far as to how much house you can potentially afford. This can also signal to sellers that you are serious and give you a slight edge over buyers who are not prequalified. That said, be strategic. Don’t mention to a seller that you are preapproved for a $500k house if their asking price is only $450k or else you may have just inadvertently handed over most of your negotiating power!
Visit your potential new house in-person! I know we’re still currently a largely virtual world in this environment, and according to a recent study by Redfin “63% of buyers in 2020 made an offer on a home they never saw in person,” but you really shouldn’t make an investment of this size without seeing it in person. A picture online may be worth a thousand words, but a visit is worth more. If you’re buying a house that has already been constructed, be sure to move picture frames, rugs, and open every closet door. I’ve heard quite a few stories from clients about crazy things they’ve found in houses they almost bought! Also take time to explore the neighborhood and surrounding area in detail and at different times of day. Is this really somewhere you could see yourself living long term?
Don’t pull the trigger until you reach a genuine consensus. If you are buying this home jointly with a friend, partner, or spouse, a life-altering decision of this financial magnitude is not the time to stay silent or settle. In fact, I would recommend that before you even look at the first house you agree that you will not buy a house unless all parties involved genuinely like it independently. Don’t succumb to the temptation of making a quick offer until you’ve had a chance to really think things through. In time, you will find a house that everyone likes, and that sure beats someone being secretly unhappy about your home for the next few decades!
Realize an Inspector is a generalist. Home inspectors can be great and uncover lots of items that need attention, but they are not usually expert electricians, plumbers, and architects all rolled into one. All that I’m saying as a two-time homeowner is not to completely judge a home until you’ve lived through all seasons and forms of weather on a day-to-day basis. There will likely be issues that are not found, and even if there are not, the next needed repair and replacement is always not too far down the road. This is another reason why you always need to have an adequate rainy day fund – and buy a little less than the most expensive house you can afford.
- Weigh the pros and cons of your mortgage terms carefully! Have you, too, been bombarded with all the advertisements and mailings encouraging people to refinance now that interest rates are near all-time lows? It’s true that it can be a great time to refinance or buy a house, but don’t just blindly chase the lowest interest rate possible. Many people are lured by saving another .25% interest or less to agreeing to 15-year mortgages versus 30-year mortgages. While less interest expense and paying off debt sooner rather than later is often a really good idea, don’t overly stress yourself or risk financial ruin to do so! A 30 year-year mortgage is going to have a much smaller monthly payment than a 15-year mortgage, and that lower required payment can give you a lot more financial flexibility should something happen to your income or a major previously unforeseen expense pop up. You can always pay extra towards the remaining principal on your 30-year mortgage if you end up not needing the extra flexibility with your cash flow!
If you are looking for your first house, a bigger house, a newer house, or an additional home, I hope these tips will be helpful to you and I wish you the very best. If you know someone else who is looking at real estate, please pass this on to them so it can help them, too!
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