By Rev. James Cook, CFP®, RICP®
Becoming a homeowner is an important financial goal for many people and is viewed as a significant “step up the financial ladder.” But if you have never purchased a home before, the decisions and process can seem daunting.
In this article, we will give a general overview of the process and important considerations as you explore home ownership.
Because the purchase of property is governed by laws — usually at the state and municipal level — our discussion will be general, and you should consult with professionals who are familiar with real estate law and other technical matters applicable to your specific circumstances.
Let’s take a look at the first four areas to consider as you seek to purchase a home.
Step 1: How long will you live in the home?
How long you plan on living in a home is an important part of the decision to buy because of the one-time costs that occur when you buy and sell property. Those costs can run into the tens of thousands of dollars. If you plan on living in a home for many years, spreading those costs over a long period of time is reasonable, but buying and then selling — and potentially buying again — in a short period of time can be costly.
Knowing how long you might be in a home can also be helpful in evaluating your mortgage options. If you plan on making this your forever home, locking in a fixed-rate mortgage for 30 years can be wise. But if you see yourself selling over a shorter period, you might be able to find better rates and terms with a shorter-term mortgage, or one with a variable rate.
“Ideally, you should create a budget before starting to look for a home so you have a realistic picture of what you can afford before you fall in love with something beyond your means. If you are working with a realtor, be clear with them about your budget so they can show you homes in your price range.”
Step 2: Setting your budget
The price of a home is the number that garners the most attention, but unless you are paying cash (lucky you!), you need to consider two areas closely.
First, what are the initial costs of the purchase that you will need in cash, which includes your down payment, loan, title and other fees.
Next, consider the regular and periodic payments you have to make, including your mortgage, taxes, insurance, utilities and maintenance. Do not make the mistake of underestimating the cost of maintenance on a home; as a matter of fact, it is wise to include savings for maintenance in your monthly budget.
Ideally, you should create a budget before starting to look for a home so you have a realistic picture of what you can afford before you fall in love with something beyond your means. If you are working with a realtor, be clear with them about your budget so they can show you homes in your price range.
Step 3: Choosing to work with a realtor
Purchasing a home can be complex. While many people choose to be do-it-yourselfers, you should be aware of the role a realtor can play if you choose to use one. Realtors generally represent either the buyer or the seller but might not wish to represent both since that creates a conflict of interest.
If you hire a realtor as a buyer, you are hiring someone with an ethical and legal obligation to represent you and your interests. If you are not represented by a realtor, but the seller is, know that the realtor might be helpful, but their obligation is to the seller, and this might work to your disadvantage.
Some realtors assess a small retainer fee as a buyer’s agent, but their services most of the time are paid for by the seller as a percentage of the sale price of the home. In addition to showing you homes to purchase, your realtor will guide and manage the purchase process for you and can serve as a referral source for home inspectors, attorneys and mortgage bankers.
Step 4: Obtaining a mortgage
Your monthly mortgage payments and the costs associated with obtaining the mortgage will be the primary costs associated with your home, so it pays to obtain the best terms you can. You can start with your own bank or credit union, but you should do your due diligence and compare rates and costs with multiple lenders. Remember, you will be living with these payments for the foreseeable future, and they are only one aspect of a homeowner’s expenses.
You might also want to consider working with a mortgage broker. Brokers work with multiple lenders and can help you explore a wider selection of products or find a lender that is willing to work with you if you have unique needs. In the competitive real estate market we are experiencing, you will want to consider preapproval for a mortgage. This involves completing a mortgage application, and sharing your financial information with a mortgage company, who will also do a credit check. If you are preapproved, you will receive a letter from the lender noting your preapproval and the maximum amount they would lend you. Keep in mind, it is not a commitment to lend — which is contingent upon a specific property — but it demonstrates to a seller that you can afford a property, and it can support the decision to accept a purchase offer from you.
With some preparation, the journey toward owning your own home can be rewarding and exciting.
Taking these first four steps will put you a little bit closer to your dream of homeownership.
Rev. James Cook, CFP®, RICP® is an MMBB Financial Planning Specialist and has been with MMBB since 1999. He brings his expertise in comprehensive financial and retirement planning to his work. Prior to joining MMBB in 1999, James, an ordained minister in the American Baptist Churches, USA, served as a pastor in churches in California. He earned his M.B.A. from the University of Missouri Kansas City, has a Master of Divinity from Fuller Theological Seminary, and a B.S. in Psychology from Lewis & Clark College.
