The Journey to Becoming a First Time Homeowner
Ever since 2016, I just knew I wanted to purchase a home. The minute this thought popped up in my head, I started researching the process to becoming a first time homeowner. From the google results, the process didn’t seem that hard, but when you put the plan in motion, it actually required more than I anticipated. However, purchasing a home far from impossible if you are about your business!
See, in 2016, I wasn’t ready. I had just graduated from my Master’s degree program and just started my first job in my field. I had NOOO idea that once I graduated, I would have to pay back my student loans almost immediately. Honestly, I was quite delusional when it came to student loans. I did not really believe that they were real. I realized that they weren’t just some myth until my credit score went down. My credit score has always been important to me so, I was sick when I watched it drop. I called Fed Loans so fast to handle the issue and that is when I got the rude awakening: I was not in school anymore so I could no longer defer my loans. Payments were due immediately and monthly. The pain that I felt when the agent told me that news is still unmatched.
At the time, I was living with my mom and was making $1243 every two weeks. So, I called myself saving $400 a check to save for a house, but my priorities were not in order. Here I was saving for a house, but I was swiping my Gap and Chase credit cards every chance I got until they eventually became maxed out. Then, I was paying car insurance, but was driving a lemon. So, most of my money was going into that. Oh, and on top of all of that I just had poor money management and was buying whatever I wanted.
Let’s Do Some Math
Check: $1243 biweekly
– $400 in savings
– $132 car insurance
– $200 Gap credit card
– $50 Chase credit card
– $180 student loans
Okay, I think you get the point. That was just a rough estimate of my expenses, but as you can see, I barely had any left over money. So, what did I do, you ask? Kept swiping those credit cards. I knew I was nowhere near ready to purchase a home, but it didn’t stop me from pursuing. Things were put into perspective for me, after attending a First Time Homebuyer Workshop through one of the HUD-approved housing counseling agencies. I knew exactly what I needed to do in order to purchase a home and have worked on these 5 things for 4 years. However, you will be able to complete these steps much quicker after reading this article.
1. Making a budget
I am honestly no expert at creating a budget. In fact, I sucked at sticking to budgets until I got serious about purchasing a home. However, the way my anxiety is set up, I am constantly writing down my monthly expenses. I like to see how much money I have leftover to play with before my account goes into the negative. Multiple overdrafts and those fees have me wired this way. (Everything’s a learning experience).
Nevertheless, purchasing a home comes with a lot of responsibility and if you cannot stick to a budget for this short period of time, then it might be time to reevaluate some things. You are the only one responsible for your money and creating a budget will help you keep your goals realistic. If after creating a budget, you notice that you do not have any money leftover, you would want to take a closer look into where your money is going. If it is predominantly going to your current residence and those bills, I wouldn’t be alarmed. However, if you notice your money is going to unidentifiable or unnecessary expenditures, you might want to tighten up. Don’t be worried though, awareness is the first step to creating change.
Now that you’re aware of where your money is going, you will know how to allocate your funds in order to get you closer to your goal of purchasing a home. On the other hand, you may also learn whether or not you can actually afford to purchase and maintain a home at that time. Notice how I said “at that time”, instead of “at all” 😉. Many people have a good amount debt that gets in the way of them being able to purchase a home. However, now that you’ve created a budget, you can determine if you are able to start paying down that debt.
2. Paying Down Debt
If you do not have any debt, GOOD FOR YOU! However, if you are like me, you may have student loans and have multiple credit lines open. Now, this is not always a bad thing if you are being responsible, but as I stated earlier on, I WAS NOT. This was the hardest step in the process for me but, when I made up my mind that I was going to pay off my debt, I stuck to it.
After you write out your budget, if you have any left over money that you would have otherwise spent on food, drinks, going out, online shopping, etc, I highly suggest taking that money and applying it to a bill. The faster you pay down a bill, the quicker the debt is gone. I know it sounds intuitive, but 9 times out of 10, if you have any type of debt, it comes with interest rates which is a factor that you have to take into consideration. (I am no way an expert of finances, so you may want to do the research on this yourself.)
Debt Snowball vs Debt Avalanche
There are two different methods of paying down debt, that I thought were helpful: the Debt Snowball method and the Debt Avalanche method. The Debt Snowball method consists of paying off your smaller debts first, while paying the minimum monthly payments. This is so that you can tackle the larger ones adding the money that you would have previously used on the smaller debts.
The Debt Avalanche method consists of paying off the debt that has the highest interest rate first, while paying the minimum payments for the other debts. If you want to use this method, you should definitely figure out which debt has the highest interest rate.
Ultimately, paying down your debt is sure to increase your credit score. Increasing your credit score is also very important when purchasing a home.
3. Building/Increasing Credit
As much as I hate the concept of credit scores, we cannot ignore their importance in our lives. In the context of purchasing a home, credit scores are important because they help you actually qualify for a mortgage . They can also help you get a lower interest rate on that mortgage, which is very important in the long run. The lower the interest rate, the lower your monthly payment will be. However, if you are fortunate enough to be able to pay for the entire home in cash, you will be able to bypass the whole process of even getting a mortgage. That is the best case scenario, but not feasible for people who do not have enough money.
So, for those who will need to acquire a mortgage, which is probably most people, in order to get your credit as desirable as possible, you will want to do a few things, if applicable:
Pay down your debts
Make payments on-time
Keep credit card usage low
Don’t open up new credit lines
Don’t get any new hard hits to your credit
Pay off any collections
These are some of the things that I know are good for your credit score, from experience. However, I am not a professional. A credit expert/consultant would be able to look at your credit history and tailor a plan that works best for you according to your needs.
If you’re younger and your issue is that you “don’t have credit”, I would suggest:
Asking for a co-signer
Becoming an authorized user on someone else’s account
Opening a secured credit card
Opening a store credit card
With these suggestions, I want you to make sure that these things are done responsibly. Don’t go ask to be an authorized user for someone who doesn’t pay their own bills on time. Don’t get a credit card and put large purchases on there that you aren’t able to afford. In other words, don’t get caught up in the goofiness. Remember, the goal is purchasing a home.
Please note, there are different types of mortgages (ie FHA, VA, USDA) and not all of them require you to have a high credit score. I have seen some mortgages that will accept as low as a 580. However, in my opinion, the goal should always be to aim at least to the 620-640 range. You just want to have the best advantage possible. Your realtor will be able to help you decide which loan type is best for you.
4. Saving Money for a Down Payment (and Eventually Closing Costs)
I suggested paying down debt earlier because it would help you free up money in order to add to your savings in the long run. How much money you have saved is one of the most important, if not the most important, step towards purchasing a home. The more money you put down, the less your monthly payments will be.
Ideally, you would want to put 20% of the purchase price of a home down. For example, for a home that’s $200,000, you would want to put $40,000 down. Although that is ideal, it is not required. From what I’ve read, VA and USDA loans do not require the buyer to put anything down, FHA loans only require 3.5%, and conventional loans require as little as 3%. (You may want to fact check this.)
Private Mortgage Insurance (PMI)
I know for sure, one reason having 20% down matters is because of PMI. If you have a conventional mortgage (like myself), PMI is required if you put down less than 20%. I believe PMI is 0.5-1% of the loan amount that you have to pay monthly on top of the mortgage payment. For example, if the loan amount is $200,000 and the PMI fee is 1%, you would be paying $2,000 a year or about $166 monthly. When you are calculating your mortgage payment, do not forget to take your PMI into account, if applicable. Don’t get discouraged though, you do not pay PMI the whole time that you are paying back your loan. Also, there are certain things that you can do to eliminate having to pay PMI. Your realtor or mortgage lender will be able to give you more information about this.
Finding where the Money Resides
I can honestly say that I didn’t have anywhere near 20% of my home’s purchase price saved, but what I did have was enough to cover my down payment and closing costs. If you don’t necessarily make enough to be able to save up a lot of money, ask family and friends for money, use money from your retirement plan, if you can, start extreme couponing, use apps that help save you money. These are all things that I actually did.
There are First Time Homebuyer Programs that give grant money to those who meet a certain criteria. This is another way to obtain money for your down payment and closing costs. You can research them yourself and ask the realtor you decide to work with.
5. Finding a Realtor
Did you create a reasonable budget? Did you pay down most of your debts? Have you been boosting your credit score? Saving money? Did you answer “yes” to all of those questions? Well, you are on your way to becoming a homeowner. While you were doing all those things, you should definitely be searching for a trustworthy realtor who will be your guide through this process. Finding a good realtor requires research. The first person you come across may not be the best fit for you. I believe, to an extent, finding the perfect realtor requires a certain level of stalking. You want to see if they have a website and/or or a social media page, read reviews about them, and see what they have to offer. You can also ask for referrals from family and friends.
I was fortunate to come across Tia Whitaker from Domain Realty Group in Philadelphia. I had liked her FaceBook page and joined her email list to receive more information before even contacting her. The fact the she had been hosting FREE first time homebuyer workshops made choosing her easier for me. I had the privilege of sitting in a workshop the year prior to my search and I knew she was the one. I could tell she had a wealth of knowledge and had worked with highly qualified professionals (home inspectors and mortgage lenders) who would help get me to the finish line.
Not all realtors have the same attributes, but the most important ones are being knowledgeable, experienced, and trustworthy. They will help you determine how much money you need saved, which programs you are eligible for, what type of mortgage you will qualify for, help you find homes based on your criteria, etc. Ultimately, they will guide you in the direction of purchasing a home. You definitely want to find a realtor you trust because they will have access to all of your personal and financial information. You can trust that they will work endlessly to get you into your dream home.
Everything that I have mentioned above, your realtor will be able to tell you with more accuracy and detail. Most of it will be redundant, but at least you can feel a little more knowledgeable and a little less anxious going into the homebuying process!