Tips for first time Buyers and Buyers on a budget
Until quite recently it has been a reasonable expectation that a hardworking couple with full time jobs and a plan could afford a house as first time Buyers. It was still a bit of a struggle for to get their foot through the door but it was seen more as a major step in life rather than a goal that is out of reach for most. There are many factors at play here: Prices have gone up quite substantially over the years; We have ever tightening government regulations for mortgage lending make the mortgage harder to qualify for even if the payments are affordable; we have a generation or two stuck in student loan payments for an education that didn’t deliver on promises of getting ahead; … and although a job isn’t hard to come by a reasonably well paying one certainly is.
If this sounds like it applies to you. Listen to me carefully:
You are not alone.
I mean, from what I can tell the above describes the majority of people under 40 in my corner of the world, in this era. Getting into home ownership and onto the great ride of home equity building has never been easy but it’s harder now. We can shake our fists in anger at the heavens but that’s not going to solve anything, although, I admit it feels kinda good sometimes. Having a plan and then following through on it does solve problems.
So let’s get started on building your plan. Some of it is, or should be, obvious: save money, pay off debt, have good credit, don’t purchase things you don’t need, make as much provable income as you can.
The tough pill to swallow though is the compromises. You will have to make some compromises or you will likely end up stuck in a financial rut for an indefinite length of time. Again, you’re not alone. It’s really common and I’ve had some rough times myself. (Realtors don’t make as much from selling houses as people think. A few do, but the vast majority, nuh uh. The money is better in owning real estate than selling it.)
Talk to a Mortgage Broker and build a plan: I would say most people don’t talk to a Mortgage Broker until they feel ready to buy a home. The first thing I ask everyone when they are looking to buy is whether they have talked to a Mortgage Broker and gotten pre-approved. But this doesn’t mean that right before purchase is the only time you should talk to one. Having a sit down talk with a Mortgage Broker or Financial Advisor is a great way to learn all kinds of useful tips and tricks about what you need to do in order to get mortgage ready. The financial world is pretty sophisticated and having a guide from early on will help you navigate it much more effectively. And guess what, it doesn’t cost you money to do so. They, like me, are not in the free advice business but they are hoping that by giving out some useful advice it will bring you back to them when you are able to follow through on a deal. It’s all a part of what us sales people call ‘prospecting’.
Get help from a cosigner or get gift money for a downpayment. As adults we tend to want to be able to do stop relying on others, particularly mom and dad, but also other relatives and loved ones. Over the years I’ve seen quite a few young(ish) couples act a little disappointed with themselves because they needed someone else to help them cosign the mortgage or gift them the money for a down payment. Don’t be ashamed of something like this. It’s not the sort of thing people talk about openly but this is more common than you probably think and the benefit to you long term is huge. Once you are out of being stuck in rental land and are in equity building land your life will change drastically, especially if you buy something within your means! Which leads us to…
Different type of home? You may still have expectations of a home that in reality is out of reach. Often, what people thought was modest is, in today’s market, not modest enough and so the mortgage is out of reach. Accepting reality is often tough, but the sooner you accept it for what it is, the sooner you can adapt to whatever it is. You really don’t want to be another one of those people who sits there waiting for the market crash that is supposed to make everything affordable again. Those people get left behind by the market. The media likes to predict crashes but even a little research into long term real estate statistics shows that there is little substance to those reports.
If you were dreaming of a house with a yard for kids and a dog to play in and room for your tools and hobbies you will likely have to alter those plans. You will likely get those things, just not as soon as hoped. Getting your foot into the door of something affordable, even if it’s not something you want to stay in long term, is the first step in equity building.
I have written more on equity building as a first time buyer in this post though the purchase price is a couple of years old on that one even for a modest condo. Which only underscores my point that had someone gone through with that plan at the time they would have a large chunk of equity now that would make it easier to purchase their next home. Had they followed through it’s likely that plan for the house with with the yard would be within reach by now. And if they really planned things well, they might have found a way to rent out the condo for much more than it costs to own it and the income helps pay for the new mortgage too. See, this is the larger kind of plan I am talking about. It takes time, a long time, but it works. It’s getting your foot through the door that is tough but a crucial start.
Take the time to understand what creates value in a home and figure out which aspects you can compromise on to make something affordable, yet acceptable for you. As I describe in the post linked to here, people get fixated on location but it’s just one of a list of factors that create value in a property.
Don’t be afraid of doing a little work to the property. Obviously, if you’re not handy you should limit how much you actually do yourself but a bit of painting and how to put up some trim is not unlearnable with the help of youtube and a chat with people who know their stuff. It adds value to your home and as for the things you can’t do yourself the golden tip of purchase plus improvements will help you build equity quickly.
So that’s the five major points I wanted to call your attention to. I urge you not to just scan past the posts linked to, the combined info can change your life if you use it wisely. I may not do the hard sales technique and fast talking style of some salesmen, but that doesn’t change the value of the contents here. The above is info that you can make a fortune from if you take the time to understand it and are patient enough to wait the few years needed to play it out.
The hardest part is getting that first purchase and getting the equity train rolling but that’s not the end of the story of course. Once you’ve built enough equity you can sell your home and use the money for the next more expensive home or you can refinance and take out some money that will help you pay bills or perhaps become a down payment on an investment property.
While you build your equity let’s not forget that you have to do some maintenance on the property and make those monthly bills. The ride can get rough when the economy turns and the property values dip for a while too but if you hang on through those tough times you will be rewarded. It may take 5-10 years before it really bears fruit in the case that you bought at peak market but in most cases it will be quicker than that and at least you are in a position of ownership right away and you have something to show for it. After all, once you’ve paid your rent bill every month, what do you have left to show for that?
The last thing I’d like to say is implied in all of the above but deserves an explicit mention: Buy modestly. Just in case your employment future isn’t as rosy as you currently think. I apologize if this post was repetitive and preachy but I have worked with hundreds, verging on thousands, of clients and I will generally try to steer them into thinking this way in hopes of making their long term financial situation easier. The vast majority are so seduced by the best lifestyle (aka most expensive home) they can afford now that they don’t heed my advice on this long term approach. The handful who do have done rather well over the years.