To buy a house or not to buy a house, that is indeed the question my friends. In the past six months, many Americans have been extremely motivated to buy a house. Primary motivations for potential homebuyers are 1) COVID-19 pandemic, 2) Social unrest, and 3) Historically low mortgage rates. These are great motivations for buying a home, however, there are many other factors to consider before taking the big plunge into buying a house. The purpose of this article is to present several actions that should be taken prior to purchasing a home.
1) Pay Off Outstanding Debt
I strongly advise you to payoff your outstanding credit card or student loan debt before purchasing a home. Do not hold your breath on a government student loan forgiveness plan to be turned into law. My recommendation is to get at least 80% of your debt paid off before moving forward with a home purchasing agreement. Unfortunately, many individuals (specifically Millennials) are feeling compelled to become a homebuyer, but have huge credit card or student loan balances to pay off every month. If those individuals were to lose their job, then they could end up in a bad financial predicament with a mortgage payment, credit card debt, and/or student loan debt. Chip away at that debt before getting sucked into a home mortgage.
2) Establish a 3 – 6 Month Emergency Savings
Before purchasing a home, open a bank savings account that is only to be used for an emergency situation. The cash value of that emergency savings account should be a minimum of 3 months of living expenses, preferably 6 months. Having an active emergency savings account is extremely wise because it allows you to be able to handle unforeseen life events (i.e., a death in the family, job layoff, finance issues due to COVID, etc.). It is paramount to get that emergency savings account established prior to buying land or a home.
3) Apply for a 15 Year, Fixed Mortgage
If you have paid off your debt and have an emergency savings nest egg, now it is time to seriously consider applying for a mortgage. Many mortgage companies offer 30+ year mortgage options. My recommendation is to apply for a 15-year fixed rate mortgage and work toward paying off the principal in an efficient manner. Currently, 15-year fixed rate mortgages are about 3%, which is still very low in comparison to the past years 2017 to 2019. This shorter-term mortgage is a great option for borrowers who can afford the higher payments while still saving and investing for retirement. A 15-year fixed-rate mortgage, with its lower interest rate and higher payment amount, builds home equity faster because you pay down the principal balance quicker. Essentially, it is a quicker path to home ownership. If your income is uncertain or variable, then by all means, avoid the 15-year fixed rate mortgage. If your salary is unpredictable, then just apply for a 20- or 30-year mortgage.
4) Veterans Should Take Advantage of VA Loans
For many who qualify, the VA loan program is the best possible mortgage option. Backed by the U.S. Department of Veterans Affairs, VA loans are designed to help active-duty military personnel, veterans, and certain other groups become homeowners at an affordable cost. The VA loan asks for no down payment, requires no mortgage insurance, and has lenient rules about qualifying, among many other advantages. Most home loan programs require you to make at least a small down payment to buy a home. The VA home loan is an exception to this rule. Rather than paying 5, 10, 20 % or more of the home’s purchase price upfront, with a VA loan you can finance up to 100 % of the purchase price.
The Department of Veterans Affairs genuinely wants to make it a lot easier for military members, veterans, and qualifying military spouses to buy or refinance a home. VA rates are more than 25 basis points (0.25%) lower than conventional rates on average, according to data collected by mortgage software company Ellie Mae. Veterans should definitely take full advantage of these mortgage perks.
5) Do Not Short Cut the Home-Buying Process
Over the past several months, many Americans are getting what is known as the “home buying fever”. Home buying fever is when individuals have an overwhelming desire to purchase a home immediately. The pandemic has contributed to an increase in severity of the home buying fever. It is good to have a strong desire to purchase a home; however, it is not good when you get so anxious that you cut steps in the home buying process. Yes, the home inventory across the U.S. is shrinking because so many people are taking the plunge into home ownership, but that does not mean you should rush the home buying process and end up regretting it shortly thereafter. There are many recent stories of people rushing to buy a home in the suburbs just to find out that the home has serious foundation, roof, or even termite issues. If these individuals would not have rushed, or even worse. waived the standard home inspection, then they would have found these issues before signing the home purchase agreement.
Patience is truly a virtue when it comes to purchasing a home. Do not streamline or short-change the process. Never waive or skip a home inspection. Get a thorough home inspection done by a certified inspection company. Before purchasing the home, make sure that ALL issues documented in the inspection report have been resolved.
All these steps and actions will ensure that you do not prematurely purchase a home that issues major issues that are discovered after the fact.
6) Cut Unnecessary Expenditures When Buying a Home
Before buying a home, it is important that you cut unnecessary expenditures out of your monthly budget. The financial burden of purchasing a home can really impact your monthly finances, so you want to have all unnecessary expenditures stricken from your finances in advance of starting your mortgage. Reduce monthly entertainment expenditures and save more money per month. Be as economically intelligent (E.I.) as possible so that the monthly mortgage will be paid-with-ease every month.
The above six (6) actions will help you tremendously in your endeavor to purchase a home. Home ownership can be an amazing experience if you practice good judgement and do not become overly anxious. Take your time and go through the complete process of purchasing a home; no shortcuts or omissions. Happy house hunting!
Jeremy G. Preston, Founder & CEO