Being a homeowner has its advantages. In Thomas J. Stanley’s book, “The Millionaire Next Door,” he reveals that 97% of millionaires are homeowners. While this figures may still hold true today, there are still many things to consider before becoming a homeowner. On the one hand, owning a home comes with a sense of power, but as stated in the 2002 Spiderman movie, “with great power comes great responsibility.”
1. Are you ready?
Probably one the most common complaint from renters is that they’re “throwing away their money.” In some cases, this may be true, but for a lot of people, renting can be a good financial strategy. One of the biggest advantages of renting is that the landlord is financially responsible for the maintenance and repairs of your space.
According to a 2017 CNBC article, approximately 69% of adults have less than $1,000 saved. Meaning that the majority of adults don’t have the funds to pay for an unexpected repair.
Additionally, NerdWallet performed an analysis which revealed that homeowners in all 50 states and Washington, D.C., pay from 33% to 93% more for housing each month than do renters living in the same state. This ownership premium is coming in the form of utilities, taxes, insurance, and other miscellaneous expenses with homeownership.
Even if you find a home with lower monthly payments, there will always be the temptation to do more with the house which leads to spending more money.
Also, visualize yourself 3-5 years from now. Do you believe you will live in the same city, work at the same job, or even have the same lifestyle you currently do?
Renting gives you the flexibility to adjust for all those major life changes. Especially considering that society is switching jobs, relationships, and lifestyles more often than previous generations, having that mobility can be a bigger asset than owning a home.
I’m not sharing all this to scare you, but to make you aware that preparation is critical to a successful home purchase.
Here are a couple of things I recommend looking into before going into full-time home hunting mode:
- Build your emergency fund: 3-6 months of living expenses.
- Research: Find out how much it costs to get the home you want and adjust accordingly.
- Increase your credit score: As close to a 700 as possible
- Run the numbers: Determine if you can afford to pay an additional 25% of your current rent, which will help you estimate the average cost of owning.
The great news is that there are several programs out there that will allow you to purchase a home without any of these items in place. But as the saying goes, “if you stay ready, you don’t have to get ready.”
2. You’re ready
Assuming you’ve prepared yourself as much as you can financially, I recommend looking into programs that can alleviate some of the financial burdens of becoming a homeowner. My wife and I used the Neighborhood Assistance Corporation of America (NACA) program for our first home, which allowed us to purchase a home without a down payment, private mortgage interest (PMI), or closing costs. There are many programs out there for teachers, veterans, government agents, and single mothers. Bankrate.com posted an article which has a pretty good list of options.
It’s also important to work with a great realtor. Do some research before you choose your realtor or ask your friends who own homes you admire. Out of desperation to have the coveted “homeowner” title, many people rush into purchasing a home without any real consideration of whether the value of the home will appreciate. A great realtor will be patient and educate you on the best options to maximize your equity (the price over what you paid for the home vs. what you sell it for). The wrong realtor may pressure you to buy quickly, leaving with a subpar home. In the long-run, this can result in hundreds of thousands lost in equity.
Generally, you should consider the following when purchasing a home:
- Excellent location: Choose a home that is close to good schools, low crime (can lower your car insurance rates), attractions (i.e., shopping centers, stadiums, arenas), views (i.e., skylines, lakes, oceans), clean surrounding neighborhoods.
- Condition: The structure and state of the home play a significant role in the value. Determine whether the home is structurally sound. Working with a good inspector is a must and will help you identify areas you can’t see.
- Family friendly: Choose a home that has at least 3 bedrooms and other amenities (i.e., a two-car garage) that may be of interest to someone with a family.
- Undervalued: This requires some skills, but some homes are worth way more than what they’re selling for. If possible, try to buy in the bottom price range than other homes in the neighborhood.
Before finalizing your decision, assess whether everything checks out. An independent home inspection and appraiser are a must.
If everything checks out and the house falls within your budget, close the deal and move in.
The idea of owning your own home is exciting, but don’t overlook the benefits of renting. The process of preparing and going through purchasing a home does take some time. Just be patient and don’t rush the process just so you can live the “American Dream.”
It’s way more important to create and live your own dreams with your own timeline. If that means pushing off owning for a couple of years, so be it. Once you get the home, continue to practice good financial habits, so you don’t end up losing or being forced to sell quickly.
Preparation, both in your finances and expanding your knowledge about this process are critical. If you get these right, buying your first home will be a much smoother process.