7 Things Financial Planners Wish You Knew About Buying a Home

buying a home

By: Daniel Bortz

Financial planners don’t just help people balance their budgets or plan for retirement; they also help their clients buy homes. After all, a house is very often the biggest financial investment you’ll ever make—so, it makes sense that these professionals would have some strong opinions on just how to go about it.

Curious what they want you to know? Read on for their top, no-nonsense tips.

  1. Buy only if you plan to stick around

When you purchase a house, you have to shell out a significant amount of cash for closing costs—fees paid to third parties that helped facilitate the sale. Closing costs can vary widely by location, but they typically total 2% to 7% of the home’s purchase price. So on a $250,000 home, your closing costs would amount to anywhere from $5,000 to $17,500. That’s a serious chunk of change!

Consequently, Craig Jaffe, a certified financial planner at United Capital in Boca Raton, FL, says it’s important to calculate your break-even point—i.e., how long it will take for you to recoup those costs.

“Typically, you want to own a home for at least three years in order to recoup the initial costs of buying the home,” says Jaffe. You can use realtor.com®’s rent or buy calculator to see whether purchasing a house makes financial sense for you.

2. Factor in the full costs of homeownership

When weighing whether it makes more sense to buy a house or continue to rent, don’t focus solely on your mortgage payments—you’ll also have to pay property taxes, interest, home insurance, utilities, and other expenses.

“A lot of people don’t budget for hidden costs” such as maintenance and repairs, says Jaffe.

You should also have an emergency fund set aside in case something goes wrong with the house.

“If your roof gets damaged or a major appliance breaks, you want to have cash on hand to pay for those costs,” Jaffe says. (If you don’t have a rainy day fund in place for those kinds of expenses, you could be forced to take on high-interest credit card debt.) Jaffe recommends building an emergency fund of 1% to 2% of your home’s value.

3. Try to make a 20% down payment

Unless you qualify for a Department of Veteran Affairs loan or Federal Housing Administration loan, you’re going to need to obtain a conventional home loan from a private mortgage lender.

When doing so, “you want to aim to make at least a 20% down payment,” says Jaffe. Why? Because if you put down less, you’ll have to pay private mortgage insurance, an additional monthly fee that protects the lender in case you default on the loan.

PMI can be pricey, amounting to about 1% of your whole loan—or $1,000 per year per $100,000. The good news? You can typically get PMI removed once you’ve gained at least 20% equity in your home.

4. Don’t raid your retirement funds

While it’s tempting to borrow from your IRA or 401(k) to amass a down payment on a home, “a retirement account is the last place you’d want to go for your down payment,” says Jaffe.

Indeed, if you borrow from either plan before age 59½, you’ll get slapped with a 10% excise tax on the amount you withdraw, on top of the regular income tax you pay on withdrawals from traditional defined contribution plans. Making early withdrawals also obviously prevents the money from accruing interest in these accounts, which could force you to delay retirement.

A better alternative? You could qualify for one of over 2,200 down payment assistance programs nationwide, which help out home buyers with low-interest loans, grants, and tax credits. Home buyers who use down payment assistance programs save an average of $17,766 over the life of their loan.

5. Make sure your credit score is up to snuff

You need to have solid credit—typically at least a 650 credit score—to qualify for a conventional home loan, and you need to have excellent credit (think 760 or above) to qualify for the lowest interest rates.

Hence, “you want to get pre-approved for a loan when your credit is at its strongest point,” says Jaffe.

To assess where you stand, pull a free copy of your credit report from each of the three major U.S. credit bureaus (Experian, Equifax, and TransUnion) using AnnualCreditReport.com. Your report doesn’t include your credit score—you’ll have to go to each company for that, and pay a small fee—but it shows your credit history, including any black marks (e.g., missed credit card payments, overdue medical bills).

If you notice errors on your report, contact the credit-reporting agency immediately, Jaffe says.

6. When buying a home, watch your spending carefully

In the months leading up to your home purchase, make sure you don’t take any actions that could hurt your credit score. These mistakes include closing old credit card accounts, opening a new credit card, maxing out your credit cards, and making a large purchase such as a new car, says Jeremy David Schachter, mortgage adviser and branch manager at Pinnacle Capital Mortgage in Phoenix.

7. Don’t bite off more house than you can chew

This one might sound obvious, but a lot of people make the mistake of buying a house that’s simply outside what they can comfortably afford.

“You don’t want to stretch yourself so thin that your housing expenses are going to stress you out each month or prevent you from saving for retirement,” says Jaffe. You can use realtor.com’s home affordability calculator to determine a price range that fits your budget.

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Getting Married? Skip the Fancy Plates and Ask for a Down Payment Instead

newlywed couple house

By: Heather Donahoe

They already have the high-powered blender, the 800-thread-count sheets, and the stemless wineglasses. And while they could always register for even more kitchen gadgetry and overstuffed throw pillows, some modern couples have their eyes on a different kind of wedding gift. What many of them want more than anything else is a house—or, more specifically (and reasonably), the down payment that will unlock the front door.

A growing number of altar-bound lovebirds are rethinking the traditional retail-based wedding registry (or registries, in many cases). Some are nudging their wedding guests toward online crowdfunding-style registries, designed to accept contributions to a couple’s down payment goals. Others are quietly suggesting “money for the house” when asked about their preferred present. Either way, plenty of couples are reconsidering altogether this gift-receiving opportunity in light of what they truly need.

A range of factors is at play here, the most obvious of which is the higher average marrying age—27 and 29 for women and men, respectively—than in past generations. It’s hardly a secret that many 20- and 30-somethings are temporarily sidestepping marriage while they establish careers, travel the world, hit up trivia night guilt-free, and, well, search for the right someone to marry.

Then again, even some younger couples seem to think that receiving a mountain of swanky home accessories before owning a home is putting the cart before the horse. After all, you can’t feather a nest if you don’t have a nest to begin with.

Twenty-five-year-old Daniel Barros and his fiancée, Traci Whiting, 24, of Plano, TX, are getting married in October. When they started thinking about setting up a gift registry, they were struck by the reality of their living situation.

“We live in an 800-square-foot apartment,” Barros said. “Even if we wanted a bunch of wedding presents, we wouldn’t have anywhere to put them. Getting that down payment together is our top priority, and we’re grateful for any amount our friends and family are willing to give to make that happen.”

To help achieve their goal of $5,500, Barros and Whiting set up a registry at FeatherTheNest.com, a Florida-based crowdfunding site that allows “nesters” to register for anything from contributions toward a down payment to funds for home improvement projects.Beth Butler, principal at the site, says crowdfunded registries offer couples a way to involve their friends and family in the most important purchase they’ll ever make.

“When you’re choosing a gift from a traditional retail registry, you’re pretty much bound to the prices of the items the couple has chosen, and even then, you’re likely giving them something they may forget about at some point in their marriage,” Butler said. “But helping a couple get into their first home, that’s a contribution they won’t ever forget.”

Butler said that her site, which launched in May 2014, now sees 15 to 20 “nests” (as each fund is called) per month.

Other similarly functioning sites—such as HatchMyHouse.com andDownPaymentDreams.com—offer comparable services, typically for the cost of a small percentage of the couple’s gift total.

Rieve MacEwen, president and co-founder of Hatch My House, estimates that the monetary value of the average U.S. wedding registry hovers between $8,000 and $8,500—an amount that, if applied to a down payment (generally at least 20% of a home’s price), could certainly give a significant boost to a couple’s savings efforts.

But not everyone is so enthusiastic. Teresa Krebs, who started Down Payment Dreams in 2009 and has since hosted some 800 registries, said that a handful of users have reported a lukewarm response from family members, some of whom felt that asking for money was tacky. But, as Krebs points out, “a registry is just a suggestion, and a down payment registry is no different. It’s a couple’s way of saying, ‘We’d like your presence at the wedding, and if you choose to bring a gift, this is what would be most helpful to us.’”

Just how helpful? When Sally and Yann Sauvignon married in 2010, they set up a registry at Hatch My House, along with two traditional retail registries. About a year after their 200-guest wedding, the couple was able to use their down payment gifts to cover the closing costs on their new home in the San Francisco Bay Area.

“We weren’t quite sure how it would be received, but I think about a third of our gifts were given through the Hatch My House site,” Sally Sauvignon said. “It was a really neat way to connect our friends and families to a goal that was really important to us.”

To be sure, the concept of a down payment as a wedding gift is still a bit of an outlier. The majority of engaged couples are still filling their conventional registries with flatware and “good” china. But MacEwen—who says Hatch My House has hosted roughly 2,600 registries since its founding in 2009—is confident that the next decade will see a more pronounced shift in the wedding gift tradition altogether.

“What will really change the way people use gift registries is when they look beyond the idea of purchasing an item, and decide they want to be a part of someone’s overall life experience instead,” MacEwen said. “Buying a home and getting married are two of life’s biggest events. Over time, I think people will realize that it makes a lot of sense to connect the two.”

How to crowdfund your dream home

Don’t be sheepish. Wedding registries of any variety are simply a series of gift ideas for wedding guests who are already planning to buy a present. A down payment registry is no different—it’s just a suggestion.

Spread the word. Share the specifics of your down payment registry on your wedding website, on any wedding shower invitations, and when friends and family ask where you’re registered.

Be grateful. In addition to the thank-you notes that you’ll send promptly after the wedding, consider sharing periodic updates about your home-buying adventures with the people who helped make it possible. It’s just another way to show your gratitude.

Leave a paper trail. When applying for a home loan, you’ll need to verify that your down payment is yours, free and clear, and not the result of another loan. Most down payment crowdfunding sites will  document the nature of the monetary gift.

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More of Your Mortgage Questions Answered

win the bidding war on the home you want

Thanks to all the respondents who submitted questions on Facebook and Twitter about the real estate market, credit scores, and mortgages for the Google Hangout on Tuesday with a panel of our experts. We weren’t able to address them all during the hangout, but panelist Michael Matthews, senior vice president of PrimeLending, answered your remaining questions on mortgages. The questions have been edited for style and clarity.

Q: Gen Y/first-time buyers seem to be finally wanting out of the basement and are beginning to look at homes; seeing lots of credit issues. Is it better for them to go FHA or conventional?

A: It depends on the person’s situation. If you call a loan officer at PrimeLending, they will run your credit and discuss the options that are available. Once discussed, they can advise you on the different types of loans that are available.

Q: What is a pre-approval and what do they look at?

A: The pre-approval is the letter that a lender can provide that shows the real estate agent that you are ready to purchase a home. Credit is pulled and income and asset information is verified and ratios are run to make sure you qualify for the house that you are interested in.

Q: What is the difference between going to my bank or to a mortgage broker? Will it save me money?

A: We recommend checking both; shopping around is in your best interest.

Q: How will the Aug. 1 CFPB changes affect my buying a home?

A: The changes happening in August will make the process easier for you. Disclosures that you receive from the lender are being simplified, which will make the process more clear.

Q: If the rate drops by the time I close, can I get the better rate?

A: That depends on your lender, but with PrimeLending, yes. They have a one-time float-down prior to closing, and there is no cost.

Q: What is the difference between an FHA and a conventional loan?

A: There are a number of differences. The FHA [Federal Housing Administration] is a government-backed loan that has a down payment of as little as 3.5%. Conventional loans also have low down-payments and most are 3% to 5% down. Your lender should discuss multiple options and run payment scenarios on both.

Q: What if the appraisal is too low?

A: When the house is appraised, the value must support the loan being offered. If it comes in low, you can renegotiate with the seller.

Q: Why should I lock in my rate?

A: Rates fluctuate daily. If you have the house selected and you are ready to begin the process, you should lock in your rate and get started.

Q: When you are applying for a jumbo mortgage, what are lenders looking for?

A: A jumbo loan is more risky, based on the amount being loaned. Like with all loans, the lender is looking at your job and the number of years at your employer and in your occupation overall. They want to know how much cash reserves you have, meaning if something unfortunate happened with your job, could you still afford to make your payments. Credit history, how well do you pay your bills, all of these items are used to make a credit decision.

Q: What “first-time buyer” programs are out there?

A: This depends on where you are buying. Most cities have programs for first-time home buyers. It’s important to find a real estate agent in your market that can be the expert for you.

Q: What’s the difference between a mortgage FICO score and other FICO scores?

A: FICO scores are used to determine your overall credit profile; there isn’t anything specific for a mortgage. When buying a car, the same FICO is being used, and you can obtain a free credit report through one of the large agencies: TransUnion, Equifax, or Experian.

Q: Is it better for first-time buyers to go FHA or conventional?

A: It depends on your loan amount, your credit, and how much you want to put down. For example, if you were going to put down 20%, you would leverage a conventional loan so that you wouldn’t be required to pay mortgage insurance. Both loans are exceptional and will be discussed when you speak with your lender.

Q: What credit scores get the best rates?

A: Each lender has different rates and will have higher rates when the credit profile is lower. Please take time to speak with a lender so they can ask questions and provide you with the information you requested.

Q: How does a job change with lower gross income affect buying a house?

A: Job change can affect buying a home if you change industries. If you make a change but are in the same line of work, you shouldn’t have a concern. Regarding lower income, if you are making less, it impacts how much you will qualify for. When you speak to your lender, they can run your income ratios and help understand your unique situation.

Q: When determining if you qualify for USDA, is your current gross income used or the income on your W-4?

A: It depends on the borrower’s type of income—for a salaried borrower there could be an average utilized, which could include both the borrower’s current gross YTD and the previous year’s W-2.

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How to Prepare Yourself for Making a Down Payment

save for a down payment

Down payments frustrate a lot of would-be homeowners. Coming up with a large sum of cash can seem impossible, but it doesn’t have to be.

Setting up a savings plan now will help you get the down payment you need and show lenders you’re a responsible borrower.

For Down Payments, Bigger Is Better

Sound financial planning can help you amass a large down payment, which has several benefits:

Make Saving a Habit

Saving for a down payment is tough, but there are some strategies you can use to making saving money a habit—not a chore:

  • Budgeting is important, because if you don’t know where your money goes, you won’t know where you can cut back.
  • Set up a payroll deposit into your savings account or set up an automatic checking-to-savings transfer on payday to make things easier.
  • Consider certificates of deposit (CDs), money market funds and other low- to no-risk savings or investment vehicles to help your savings accumulate faster.

Give Yourself a Boost

Saving for a down payment one paycheck at a time can be frustrating. To help you get there faster, use some of these tricks:

  • Cut back on nonessential spending. Do you really need to pay for Starbucks, name-brand items or subscriptions to magazines and cable TV? There could be many items you can eliminate from your budget, and the savings would be substantial.
  • Reduce your credit card debt to save credit cards for emergencies only.
  • Adjust your tax withholding to make sure you’re not overpaying. It may feel good to get a tax refund in the spring, but that really is a free loan to the government. The money you get back is cash on which you could have been earning interest. The IRS website has a calculator to learn how much in taxes you should have withheld from your income.
  • Liquidate expendable assets. Saving for a home may be just the reason you’ve been looking for to unload stamp, coin, baseball card and comic book collections or other items that are collecting dust in your closets, safe deposit box or storage space.
  • Get another job. If you are already squeezed, consider working retail during the holidays, selling on eBay, taking on freelance work or finding some other source of income solely for the purpose of saving for that down payment.
  • Organize. That’s right: Sell all that stuff you never use that won’t be a good fit for your new home. Clear the clutter—an organized home is a time-saving home, and time is money.

Updated from an earlier version by Broderick Perkins.

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