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Our Homebuying journey and the mortgage process

As I mentioned in my last finance post - more transparency in this area is something I'm looking to provide more of to y'all and since I started off with my argument for why I personally believe homeownership is a solid financial choice today I'm talking more in detail about our personal journey.
 

Just because home ownership is a good idea doesn't mean it's good idea for everyone. While there are formal qualifications you'd go through with the mortgage process I feel like there is a place you should be in in your life before event thinking about homeownership:


1. Have an emergency fund - typically at least $1,000 starting off but certainly more is better. I think its hard to set a given amount because everyone has a different financial situation but enough that paying an insurance deductible or replacing an appliance could be done so with cash. Life happens, if something unexpected came up and would give you trouble making your mortgage payment you're not ready to have one
2. With that - have insurance! Car, Health, Renters / Homeowner and life insurance. If you cannot afford these you are not ready for the "building wealth" stage of your financial life
3. Have a steady, reliable source of income. If you just got a big promotion I strongly recommend settling into that role to ensure it's a good fit before locking into such a big commitment.
4. Have a low debt to income ratio. Some financial advisors like Dave Ramsey would say that you should have no debt before buying a home - but where does Dave expect people to live? As I've pointed out renting lowers your standing of living and builds someone else's wealth. Obviously if you are only making minimum payments each month or have a large debt compared to annual income you should focus on that first but I don't think student loans, car notes and a small amount of credit card debt should keep you from buying a home as long as you can afford the monthly payment and paying off debt.
5. Have a down payment and closing cost - I'll discuss this further but depending upon your loan you'll need to put down 3.5% to 20% of the home price in cash. You'll also have inspection, appraisal, legal and moving costs.  
 
 
 Once you feel like you're in a position to buy it's time to figure out your price range. Between getting that first credit card in college and now I have made A LOT of dumb financial moves but there are three things I've always done right - contributed to my 401K , never purchased a car more than 1/3 my salary and never purchased a home more than 3 times my salary. This isn't a hard rule, just a general guideline on living within ones means. Now personally I don't value flashy cars and I'll probably spend more on my next one but my last car purchase was more of a 10% of my salary kinda car. In general (because there are many factors to consider) if you have good credit and a low debt to income ratio you can get approved for a mortgage three to four times your household income. Because home prices in Memphis are pretty reasonable and my husband and I are both employed in good jobs a house at that price would be  . . . wow. But to be quite frank not only would a house at that price be well beyond what we need or could even use but buying a house 4 times your income is in my opinion going to make you "mortgaged up to your eyeballs" so we never for a second considered buying beyond my rule of 3. Most financial advisors would say your household expenses should be 1/3 to 40% of your income, no more than 50% if you live in a very high cost of living area however, I think a much better way to calculate what you can afford is to look at your household budget, find what is a reasonable monthly payment for you and use a mortgage calculator to determine what home price would have that payment. I like this one the best because it calculates what your total payment will be to include property taxes, homeowners insurance and if you are putting less than 20% down PMI ( I will touch on that in this post).
 
 
When we looked at our budget we decided that we personally felt more conformable with a lower mortgage payment. Sure, we can afford a payment on a house three times our income but we know ourselves - we spent a higher % of our income on entertainment that the average family and we don't see that stopping and I know me  - I shop more than the average woman and will always spend a certain amount of money frivolously each month. So for us even my rule of 3 was way more than we wanted to spend and we looked lower. Once we decided what we wanted our monthly payment to be we started casually looking at homes in that range and when we found one that we were interested in we started looking at homes in person not just online and worked with a mortgage broker to get pre-approved.
 
 
There are several types of mortgage loans - if you are a veteran you can qualify for a 0% down VA loan and there are also loans designed for first time younger buyers than require little to no down payment but the most common loans are conventional and FHA and you can typically expect to be required to put down 3.5% to 20% towards the purchase. Regardless of the loan type if you put less than 20% down on a home in addition to the mortgage, insurance and taxes payment you'll be making a monthly PMI payment until your amount owed is less than 80% of the home value. This payment is basically the cost of borrowing and provides extra coverage to the bank - since you have less invested in the home you have a higher risk of defaulting on your payment (think subprime crisis in 2008). Now, some financial advisors would say to never buy a home without being able to put down 20% and while that is not bad financial advice I don't think it's realistic nor should not having 20% be a deal breaker. We purchased our home with an FHA loan and were able to use the equity from the condo as our down payment. The advantage of an FHA loan was the favorable rate and being able to make less than 20% down payment but the disadvantages can be that there are price restrictions and more requirements for the home to qualify - because we were buying new construction and didn't want to buy three times our income this was not an issue for us but if we had purchased a resale home at a higher price point we would not have been able to go this route.


Paying PMI each month is money you will never get back, it doesn't add value to your home and it creates no equity so it makes sense that many financial advisors would encourage people to only buy homes with a 20% down payment and I agree that financially that is the best approach but I live in the real world. If I had thought about good fiancés when I was in my 20s this absolutely would have been my plan but I think you have to consider where one is in life as well. I'm in my early 30s and would like to start a family soon, to be perfectly honest I just don't have 3 years to save that 20% down payment to wait for the family home nor do I think sinking all our cash into a home is a good idea when we're looking to start a family. I've never seen a home rent for less than the mortgage on it would be anyway so when you buy, even with a PMI expense you still have some years paying towards your principle and building equity in your home, and you can always make early payments so why not save for that 20% while living in the home? Also, homes do appreciate in value over time - our home appraisal actually came in $15K over what we paid - that's equity towards our loan to value ratio and $15K closer to the principle owed amount for the PMI payments to go away. So when buying with less than 20% on the front end it's important to shop smart and try and negotiate the best deal possible in your sales price. One thing to keep in mind is that once you have PMI the minimum is one year so you can't buy a house, make a large lump sum payment two months in and stop paying PMI. Also, as a homeowner it's important to monitor the value of your home and get it reappraised if necessary.


When we started looking at homes we felt like we would be going under contract to build and have an additional 6 months before we moved in. Our first offer on a home was exactly this plan but we just couldn't come to an agreement with the builder, meanwhile while we were negotiating another home was being built in the neighborhood next door that had a lot of the things we were looking for - only it was being built for someone else under contract. But then surprise surprise right as we realized that we were never going to come to an agreement with the first builder we placed an offer with the contract on this other house fell through and the listing made its way online where I book marked it as one to drive by that weekend. Since the house was vacant we were able to walk in and show ourselves around - the floor plan was perfect as were all of the room sizes and a lot of the features we wanted were already in the home there was only one problem - this house was alreadybuilt  builder was ready to sell it NOW. Our neighborhood is a little unique in that none of the homes are the same, some might have the same floor plan inside but the exterior will look completely different so if we wanted this house in this neighborhood we were going to have to buy it right then instead of in 6 months. Spoiler alert: we bought the house!


I want to use this to be completely transparent: buying a house 6 months ahead of our plan was not the best financial thing to do. In the long term it was right for us because we got the house we wanted, we locked in a really great mortgage rate and we locked in a better price because the builder raised the price after we bought ours. But in the short term, which btw we are still in, it wasn't so great. Our plan during that 6 months was to save up more cash for stuff inside the home. And let me tell you, man did I underestimate how much things cost inside a home and took for granted the things that a resale home would include that a new construction home does not - we're talking towel racks, toilet paper holders, blinds and curtain rods, mirrors in the bathrooms and you know I didn't go the basic / cheap route with any of that . . . it all adds up. Not to mention we went from a 1,000 sf condo to a 3,000 sf home - needless to say we had very little furniture. We tried to not go crazy but the reality is without the extra cash we had planned on saving we made some purchases on credit. I spent so much of my 20s working on paying off stupid credit card debt and I really hate having some again but in two months we'll actually own all our furniture Woohoo! And once we pay off what we have we're going to be saving to buy what we want for cash - sometimes it feels like it never ends!


I know some of you are reading this shaking your heads saying you all should not have bought and some of you are thinking so what, having some debt is completely normal but our long term goal is to have our mortgage as our only debt so it was a big decision for us to change our schedule. And I want you to know that while I advocate for being fiscally responsible I don't make the most fiscally responsible choice 100% of the time because at the end of the day owning a house is an investment and it is a tool for building wealth but it's still a home and there's a lot of emotion in that. This past year has really challenged me personally to think about my priorities and say no to what I want right now and focus on the big picture - I've had to cut my personal spending in 1/2 and if you know me at all you know that was hard. Every now it then I get a little sad and a little jealous of material things but most days I wake up, watch the sunrise out the bedroom window and it is completely worth it.




***This is not a sponsored post, all opinions are my own. If you are interested in your long term financial health I strongly recommend talking to a financial advisor - if you are local I have a great one I'm happy to recommend. Numbers I used here are simplified because I understand I would bore most people if I broke down the full math but when it comes to YOUR money, always know the full math behind the calculations***

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