Hey, guys.
It's Chelsea from The Financial Diet,
and this week's video is sponsored by myFICO.
Now, one thing that we don't talk about all the time here
on TFD but is always a pretty big subject of interest
from you guys is home-ownership and the process
of buying a home.
Now it's true that many millennials are waiting
until later in life to buy a home,
and that does make sense when you consider
a lot of financial realities of our generation,
but it is still a goal for many, especially in the longer term.
Full disclosure, I'm not currently
personally a homeowner myself, but it
is high enough on my to-do list that my husband and I are
actually in the very early stages of getting pre-approved
for a mortgage, so we can start shopping.
The good news for most of us is that if we
plan with the right budget and long term
financial adjustments, we keep a realistic idea of the home
we can afford and that is right for us,
and we prioritize it consistently
in our financial management.
Home-ownership can be a reality, but we have to prepare for it,
and here are nine of the things you
are going to want to check off your list
in order to buy a home.
Number one is deciding that you actually even want a house
because although it might seem obvious that home-ownership
is an automatic next step for young adults,
it is not necessarily the right choice for everyone.
I cannot tell you how many times I've heard phrases like renting
is just throwing away money because you're not building
equity in that property, which I don't think is a very logical
way to look at it.
Because, ultimately, you're not throwing away money,
you're paying for a place to live.
And while home-ownership may in some financial situations
be a better option, it's not an automatic guarantee.
But I think it's also tied up in the fact that a lot of us
tend to have a very outdated view of home-ownership
in the sense that you're not a real adult until you become
a homeowner, and these views simply
do not take into account the many benefits
of not being a homeowner.
First and foremost, if you are renting,
the property's owner is responsible for the maintenance
and upkeep and repairs of the home.
You might have heard of people referring to home ownership
as sometimes being a money pit because of all the things
that can go wrong in a house, or all
that it may need just to get it up to a livable standard.
When you're renting, these major repairs and maintenance
are simply not your problem.
Renting also gives you a lot more flexibility.
For example, if you may need to move
on a shorter timeline because of employment,
or relationships, or any other personal reason,
being able to leave a lease is much easier
than being able to sell a home in what
may not be a good market for it, or the right time for you.
Also, it's important to note that buying a home
is not the only way to set yourself up
for a healthy financial future.
For example, investing in a retirement account with all
of the tax advantages that that provides
and expecting average market returns
can set you up for amazing long-term returns
on your money.
This is of course not mutually exclusive with home-ownership,
but it's important to remember that there isn't just one
way to set yourself up, and to also understand
that if home-ownership isn't right for you at the moment,
doesn't mean you can basically do nothing productive
for your financial future.
Now, of course, home-ownership does have many advantages
and can be an amazing choice for you financially,
but you have to set yourself up to get there.
So, the second thing you'll want to do
is get your FICO scores in shape.
Like many big money goals, buying a home
typically requires you to have good FICO scores.
The credit score that you will need in order
to apply for a home will depend on a lot of factors,
such as the lender and the type of loan you're applying for,
but more on that in the next point.
For most conventional mortgages, you
will need a credit score of at least 620 to be considered.
However, the higher score you have,
the better chance you'll have of qualifying for a lower rate.
But did you know that there are specific versions of the FICO
score that are used by mortgage lenders?
Mortgage lenders usually pull the score versions
from all three credit bureaus, and then they
use the middle score for their lending decision.
So you need to know your mortgage scores from all three
credit bureaus to be sure that you're
looking at the middle score that your lender will use--
that's where myFICO comes in.
If you haven't heard of myFICO, yet myFICO
is the consumer division of FICO--
the people that make the FICO scores.
While there are lots of places to find a credit score online,
there aren't many places outside of myFICO
where you can find all three of your mortgage scores.
And while they may look the same,
other credit scores can vary as much as 100 points
from your FICO scores.
Do your research ahead of time and don't
be surprised by your score when you apply for a mortgage.
In addition to all three mortgage scores,
myFICO allows you to compare your FICO scores and credit
reports from all three bureaus--
Experian, Transunion, and Equifax, side by side.
You can make sure to get the right score for your credit
goal, whether it's FICO scores used for mortgages
or you're in the market for an auto loan or credit card.
Check out the link in our description
or visit myfico.com to get more information.
Number 3 is researching your mortgage options,
which is actually at the current stage of the process
that I am in.
Depending on where you live, your finances, and your credit,
you may have several different mortgage options
available to you at any given time, some of which
will require much less than the famed 20% down
payment that many of us are used to hearing about.
Here are just a few options beyond a conventional mortgage.
An FHA loan, often cited as a good option
for first time homebuyers.
If you have a FICO score over 580,
you may be eligible for an FHA loan
with a down payment of just 3.5%.
FHA loans typically require a debt
to income ratio of less than 43%,
and we'll talk about this more in my next point.
A USDA loan is helmed by the US Department of Agriculture,
and this type of loan is typically
for those with low-to-moderate incomes
and in largely rural areas.
If you're a first time buyer or don't meet typical mortgage
requirements, these can be a good option
as USDA loans don't require a down payment
and can have a lenient credit score requirement.
However, there are strict guidelines
for where an eligible property can be located
and strict income limits.
The annual income limit for a one to four
person household in most eligible counties
is $90,350, and $119,200 for five to eight member
households.
In a higher-cost area like San Francisco County,
the limit jumps to 212,550 for smaller households,
and 280,550 for larger ones.
The USDA sets limits at or below 115%
of the median household income in each region
and updates them annually.
There are also different types of conventional loans,
such as fixed-rate and adjustable-rate.
Whether they're conforming or nonconforming,
all mortgages require you to pay interest.
With a fixed-rate conventional loan,
the interest rate stays the same for as long
as you have the mortgage.
Many buyers choose a 30-year fixed-rate conventional loan
because it usually results in an affordable monthly payment,
but shorter terms are also available.
The alternative to a fixed rate mortgage
is an adjustable rate mortgage, or ARM.
Conventional loans with adjustable rates,
also known as hybrid ARMs, have rates that
may go up or down over time.
ARM rates usually adjust annually
after an initial fixed rate period of three, five, seven,
or 10 years.
Lastly, we'll also link you in the description to a TFD video
from our friend Tasha Cochran where
she details the specifics of getting a VA loan herself
which are available to veterans.
At the end of the day, you'll want
to do the research to find out the mortgage that
makes the most sense for you both now
and down the road, which brings me to my next point.
Number 4 is calculating how much house you can afford.
Depending on the kind of loan you get, your mortgage payment
will not usually be as straightforward as your rent
payment.
On top of your monthly mortgage payment,
you'll also have to budget for property taxes, which
can be pretty damn high in places like New York
City, private mortgage insurance, which you'll
typically need if your down payment was less than 20%
and can often cost a few thousand
dollars a year, homeowner's insurance, homeowner's
association fees, et cetera.
Additionally, your mortgage rate will depend heavily
on your credit score.
While Fair Credit may qualify you for a mortgage,
your best chance of getting the lowest possible rate
is going to be from having a score in the excellent range.
We'll link you in the description to a home
affordability calculator.
Number 5 is determining how much you
need to save before closing.
Now my previous point was all about the costs
associated with owning your home on the long term,
but we also need to think about how much it actually
costs you to get into your home initially.
When you're a renter, your cost of getting into your unit
are fairly limited and straightforward,
often a month of security deposit and your actual cost
associated with moving, if you're not
handling it yourself, but if you're a buyer you
have much more to consider.
You have your down payment, which
is up to 20% of your total purchase price
depending on the type of mortgage you get.
Your closing costs, which are about 2% to 5%
of the loan principal, and can include application fee,
appraisal fee, credit check fee, origination and/or underwriting
fees, title insurance, title search fee, and transfer tax,
if applicable.
Lastly, a home emergency fund, which we'll
get into at a later point.
We'll link you to a complete list of closing
costs in our description.
Number 6 is creating a list of must-haves and nice-to-haves.
Unless you have a completely unlimited budget,
in which case, why are you watching this channel?
No home you buy is going to be completely perfect, especially
not right off the bat, so it's important to make a list where
you actually understand what is absolutely
non-negotiable for you, and what is
negotiable, but nice to have.
Because once you start looking at places,
it's very easy to get those two things confused.
And the difference here is pretty self-explanatory,
your needs should be things that you really absolutely cannot
live in the home without, whereas your nice to haves,
no matter how nice they would be to have,
are things that can ultimately be negotiated with.
Being clear about the difference between these two things
is crucial to making sure you're not spending up
to the absolute maximum on the home that you could afford,
which will often leave you without any wiggle
room in your budget, or for incidentals, which
you absolutely want to avoid no matter
how much that broker is trying to get
you to go up to your limit.
When determining these lists, here are a few things
you'll want to consider.
Location.
Where do you want to live?
Is it within your price range?
Number of bedrooms.
How many does your household need versus
how many would be nice to have.
Does anyone in your home need their room
to be on the first floor?
The type of home you want-- single family standalone,
townhouse, condo, et cetera.
Total indoor and outdoor space.
How much do you want?
Will moving slightly further from your city or town center
be worth it if it means more space for less money?
Distance to public transportation,
being move-in ready, i.e.
No renovations imminently needed.
Are you willing to put in some work
or to hire a contractor for a lower purchase price?
Garage or parking space, which is a major consideration if you
drive, but a total non-necessity if you don't.
Central air conditioning.
If you live somewhere really warm,
this might be an absolute need.
But if you live in northern New England and only really turn
on the AC for a month out of the year,
would window units suffice?
Amenities.
For instance, do you absolutely need in-unit laundry or even
a separate laundry room?
Flooring.
Are you OK with wall to wall carpet,
or must you absolutely have hardwood?
We'll link to a good home checklist
to get you started in the description.
Number 7 is having a robust emergency fund.
When you own a home, there's a lot
to consider having available in your emergency fund that
goes beyond your usual three to six months of expenses
that we've talked about many times on this channel.
For example, if something in your home needs fixing,
you'll be on the hook to pay for it,
and homeowner's insurance may not
cover it right away or in full.
According to realtor.com, your cash reserve target
should be about 1% to 3% of your home value.
So, if your home is worth $500,000,
Ellis suggests setting aside $5,000 to $15,000,
and of course, each situation is different.
A homeowner with a new home with all new systems and appliances
might not need to tap into a home repair emergency fund,
while fixer-uppers and old homes of course
will likely require that money sooner.
Number 8 is to shop around for your home and your mortgage.
Just like you shouldn't put an offer
on the first home you see without checking out
any other options, you don't want to necessarily rush
headfirst into the first mortgage that
is offered to you either.
You'll want to apply for mortgages
from several different lenders to see the best
rates that you'll be offered, and don't
worry too much about the impact on your credit.
Some people worry that each time a lender
makes a credit score inquiry it depresses a borrower's credit
rating.
But credit agencies can tell when a homeowner is simply
making the rounds, and they recognize
that mortgage-related queries usually
result in a single loan.
Consequently, agencies cut house-hunters some slack,
and don't allow the multiple queries to negatively impact
credit scores, provided that the loan hunting occurs
within a narrow time period.
For example, FICO scores disregard multiple inquiries
when they happen within a 45-day window.
And lastly, remember that you can negotiate.
Once lenders provide estimates, borrowers
are entitled to negotiate for better terms, especially
if they can make above-average down payments
or if they boast excellent credit histories.
This may include asking lenders to shave interest rates
or reduce certain fees.
Lastly, number 9 is take time to find a trusted realtor.
Before you start the process of actually buying your home,
you'll want to find a realtor whom you trust,
enjoy working with, and you feel shares your best interests.
Testimonials are great, especially when
they come from someone you yourself trust.
And, according to Bankrate, look for a real estate agent
who is a Realtor with a capital R.
That means they're a member of the National
Association of Realtors and have formally agreed to abide
by the group's code of ethics.
Some realtors also have certifications
to show that they've completed training
in a certain area of real estate.
Some designations include a CRS, or Certified Residential
Specialist, someone who completed additional training
in handling residential real estate.
An ABR, Accredited Buyer's Representative,
completed additional training in representing buyers
in transactions.
And SRES, Senior Real Estate Specialist,
completed training aimed at helping buyers and sellers aged
50 and older.
Talk to several different realtors
before you make your decision, do your research,
and make sure to review your contract carefully
before you sign anything.
And if you are ready to get the process
started like I am, don't forget to go to myFICO to get
the right score for your credit goal,
including FICO scores used for mortgages.
So as always, guys, thank you for watching.
And don't forget to hit the Subscribe button
or to go to thefinancialdiet.com for more,
and to come back every Monday, Tuesday, and Thursday
for new and awesome videos.
Goodbye.