New Year, New Opportunities

The onset of the new year is often symbolic of a time to reassess one’s life – a moment in time to consider which of one’s life goals remain unmet but still attainable.

As January arrives each year and winter settles in, the new year becomes a time for most who hope to start fresh and anew. This is especially true of 2020, a year most of the world would agree is best viewed (and offers the most insightful lessons) by looking through our collective rearview mirror.

If you are like most Americans, buying a home is likely to be one of your primary life goals. And the new year is a perfect opportunity to begin to get serious about homeownership by creating a path or plan that leads to homeownership.

Remember, the difference that exists between a dream and a goal is simply the creation and implementation of a viable plan.

So, if 2021 is the year you have decided you are ready to become a homeowner, there are several strategies – which at this time of year are known as resolutions – to implement that have been shown to assist those in purchasing their first home.

First, Though, What Not to Do…

Sometimes the best lessons teach us what not to do.

Here are several sure-fire ways to sabotage your efforts if you intend to set homeownership as a reachable goal for 2021:

• By failing to allow sufficient time to save enough funds for a down payment and required closing costs.
• By failing to pay down as much debt until finding a home to purchase.
• By failing to proactively try to improve a credit score and one’s overall rating.
• Failing to create a realistic budget to maintain the home once purchased. While it is not possible to know precisely what it will cost to maintain a home, it is helpful to ask the current owners for bills/invoices that identify the costs to maintain the home for the past year.
• By failing to consider the other costs of homeownership, like real estate property taxes, PMI – Private Mortgage Insurance (for homebuyers with a down payment that is less than 20% of the purchase price), or homeowner’s insurance, among others.

The reality is these above-noted intentions (saving while paying down debt) battle for the same disposable dollar… which requires most of us to learn to maintain enough self-control to remain committed to one’s prioritized promises. And it can take months (and often, years) to save enough, pay down debt enough, and improve one’s score to put oneself in a position to buy a dream home when found.

The year 2021 is offering historically low-interest rates. If you have yet to consider the purchase of a home, the current interest rate environment provides one of the most favorable rate environments in which to buy – ever!

New Opportunities – Financial Strategies That Help Prepare for Homeownership

The first step in preparing to purchase a home is to do some financial housekeeping.

Begin to Track Your Spending Patterns.

Tracking one’s spending habits is an old stand-by technique. Proactively tracking one’s spending is effective because most individuals have an amazing inattention for pesky details (the exact details followed) and often (without even a conscious effort) choose to forget what and how money was spent.

By tracking one’s spending, previously-unseen patterns begin to emerge that help identifies wasteful or over-spending. Here are a few simple suggestions for tracking your spending in real-time that require just a little effort:

• Create a spreadsheet.
  • Pro- this is a customizable option.
  • Con – it requires manual input.
• Consider using an application that is designed to track spending. Examples include Wally, Acorns, or Intuit’s Mint, among others.

In only a month, you will have amassed enough data to understand where your spending is careless and could be easily modified to allow you to save or pay down debt rather than splurge on a $6.50 mocha latte.

Save for a Down Payment.

When you have a handle on your spending by tracking it for a month or so, the next step is to begin to save for a down payment on the home. Unless you are an honorably discharged veteran – as the VA offers no down payment mortgages – most homebuyers will need at least 3 – 5% of the purchase price, depending on the borrower’s financial scenario. And if you want to avoid PMI (Private Mortgage Insurance), you will need, for most mortgage products, at least a 20% down payment.

The easiest way to begin to save for a down payment is to develop a realistic budget that allows for a certain amount of money to be allocated towards a savings account earmarked for a home purchase. The reality is that small changes to one’s spending habits can add up over time – limiting the meals purchased at restaurants, eliminating a subscription to a magazine, or choosing a more cost-effective gym in which to belong.

The key to saving for anything is sticking to one’s budget and choosing to avoid the many rationales egos have for fulfilling their hedonistic need for instant gratification. In time, a budget will help you reach your goal for a down payment and closing costs. Here are a few tried-and-true strategies to help save:

• Be sure to automate your savings – money that is never seen is hard to spend.
• Be sure to ask about discounts from a phone company, cable company, or any other creditor.
• Reduce energy costs also to help reduce your carbon footprint.
• When possible, pack a lunch. Even a $10 lunch each day that is replaced with a packed lunch will save upwards of $2,500 each year and likely improve one’s health as the food contents are known and controlled by the person eating the lunch.

For those who have yet to begin to save, it is critical that you reduce your living expenses and begin to put a little away with every paycheck, and let the time value of money (i.e., compounding interest) work for you!

And while this bit of advice should be forever implied – Do Not Save by Using Your Credit Cards to Meet Your Living Expense! This will ultimately increase your debt (and thus, your debt-to-income qualifying ratio), which will either raise the interest rate or cause the mortgage application to be rejected by the underwriter.

Do Not Increase Debt & Try to Maintain a Low Credit Utilization Rate

While one’s employment history and income/earnings are critical factors for mortgage underwriters when deciding upon an applicant’s approval, the applicant’s debt-to-income ratio is also a necessary affordability test for the credit decision-maker.

As such, borrowers need to avoid increasing their debt load – by delaying/avoiding large purchases that will ultimately increase debt and, thus, your debt-to-income ratio. An excessive debt-to-income ratio can quickly become the reason for a mortgage application denial. For example, hold off on buying all new kitchen appliances or that riding-mower until after you close.

Should you be concerned concerning your current debt-to-income ratio and how it may have an impact on your ability to purchase a home, speak with a mortgage professional who can help sort through the relevant mortgage guidelines. When ready, you can apply online.

Seek to Improve and/or Maintain Your Credit Score.

Credit scoring is a significant factor that is used by mortgage underwriters when determining one’s mortgage approval eligibility. However, each consumer is now entitled to receive one free credit report (from each repository – Equifax, TransUnion, or Experian) each year, which now permits each of us to proactively manage our current credit score and profile.

Credit scores are living, breathing metrics that are revised each month based on the activity of all accounts within the credit profile. The good news is that homebuyers can continue to work on/improve their credit before and while looking for a home to purchase/applying for a mortgage loan.

Obtain a Pre-Qualification From a Mortgage Lender

The most prudent way to search for a home to buy is to do so with a pre-qualification letter in hand. A valid pre-qualification letter is the most legitimate way to show a seller that:

• You, as a buyer, are serious and committed to the offered purchase price.
• You, as a buyer, are qualified and have the finances to secure the mortgage required to complete the purchase, as agreed.

A pre-qualification letter will increase the odds of making a deal for the home at the price you wish. It is noted that should, during the process of searching for a home, your debt-to-income ratio or credit score improves, it may be prudent to request that the lender re-evaluate your financial situation and re-issue a revised pre-qualification (maybe at a better interest rate or loan amount) based on the updated information.

Obtaining a pre-qualification letter is similar to applying for a mortgage – minus property and, therefore, an appraisal. Depending on your particular financial situation, a mortgage lender may ask for these documents to issue a pre-qualification letter:

• For W2 employees, the underwriter typically requests the last two paystubs.
• For 1099 employees (independent contractors, etc.), the underwriter will typically require the last two years of tax returns (the 1040s) – all pages signed.
• Bank statements (all pages) for the past two months to evidence down payment and closing cost funds.
• Any other financial document that would help a mortgage underwriter make the best-educated credit decision.

Decide Where You Want to Live

Because of the unusual economic climate created by the Coronavirus, first time home buyers are facing what is likely the worst affordability crisis in the past century. Financial pundits do not anticipate the market to cool in the near future, which, in effect, will make finding smaller starter homes more difficult. It is for this reason that many first-time homebuyers are forced to consider a more affordable option like a condominium.

Online real estate websites – like Tulia, Redfin, Zillow and HomeFinder are helpful, but it is best to speak with real estate and mortgage professionals in your home search. Additionally, check out (and mask up) some open houses, and be sure to take notes and pictures, which will allow you to compare and contrast the many homes you have seen.

Be Certain to Have a Home Inspection

With a competitive marketplace, many buyers are looking for ways to outshine their competition. One of the ways is to waive all contingencies on the purchase of a home, which, many learn way too late, can be an abysmal decision.

While it might make your purchase offer rise to the top of the offer-pile, waiving a home inspection opens up various risks for homebuyers. A home inspection is a worthy investment as it flags issues that may not be otherwise visible. But perhaps, most of all, a home inspection provides homebuyers with something even more valuable – peace of mind. Consider this prudent advice:

• Be a part of the home inspection and ask questions during the process.
• Employ a home inspector who is licensed, qualified, and is recommended by someone you trust.
• Take pictures throughout the inspection that can be used during the final inspection as a comparison.

Wrapping Up

One’s mortgage is likely to be the most considerable debt of their lifetime, and with it comes the largest monthly obligation one is likely to have. So, if you are on the precipice of a homebuying decision, use the above-noted tools and techniques to ensure you secure mortgage financing at the best possible rate and terms – given the rate environment and your financial situation.

As UCLA winning Coach John Wooden so aptly notes – “Failing to prepare is preparing to fail.”