The desire for homeownership connects people from all walks of life. It creates the feeling of security and permanence. It leads to wealth building. According to Eye on Housing, Americans focusing on financial security have 24% of their wealth located in their primary residence. This is more than any other asset, including stocks, bonds, 401ks and business interests.
Buying a home will be one of the biggest decisions and largest purchases in your lifetime. Understanding the home buying process can assist you in purchasing a home that fits your needs, budget and life plans without the fear of financial loss. The first step in the homebuying process is prioritizing goals and budgeting for the ideal home in an attainable price bracket. Here are some of the starting points to consider when beginning the home buying process to improve personal wealth long-term.
What Are My Goals?
Homeownership can be a lucrative way to increase financial wealth, if it fits into your long-term goals. Owning a home is considered an investment that pays out over the years for most Americans that use these homes as a primary residence. Answering these questions about long-term personal goals can help clarify if buying a home is the right choice for wealth growth:
- Job Status: Are you only planning to stay with your current job a few years? Is this a job you hope to keep long term? Is there opportunity for growth within the company within the department? Will a move be required for career advancement? These answers can help determine if buying a home will work in the long run for your wealth growth. Job stability is one of the most concerning factors for all Americans when purchasing, but is more prevalent with millennials, who as a group lag behind in homeownership compared to previous generations.
- Home Occupancy Length: This is a concern for many millennials, who as mentioned above, may find job-hopping as a part of their early job career. Military members also must consider the longevity of duty stations when considering a home purchase. Currently 18% of military members purchase homes. This number is increasing and the military has some of the highest rates of homeownership among millennials.
- Is This the Start of Your Portfolio? Have a long-term goal to start using homes as investments? There is no better time to start than now. Overall, home equity is on the rise and starting now can increase the chances of profit long-term.
How Much Can I Afford?
Many potential homeowners are confused and unsure of how much “home” they can afford on their income. Use these guidelines when considering a budget for a home.
- Mortgage payments: Your mortgage should be 25% or less of gross income. Monthly payments consist of the mortgage cost, homeowner’s insurance, property taxes and mortgage insurance (if a conventional loan is used). Some buyers can qualify for as high as 32% of total gross income, but this often is not a safe bet for buyers who wish to purchase conservatively. Shopping homes with monthly payments that fall into the range of 25% of gross income monthly is the safest and more lucrative way to gain wealth.
- Down Payments: When using a FHA or Conventional Loan, a down payment is required for purchase. The total percentage needed varies from 0% to 20% depending on the type of loan. What can you afford with your current savings?
- Request Credit Reports: Not sure where your credit score stands? Request credit reports from the three most commonly used credit bureaus about six months prior to beginning your hard search from Equifax, Experian and TransUnion. This will assist in guiding your budget based on calculators to keep the search within the loan ballpark for buyers.
What Am I Looking For?
Everyone desires their “dream home”, but going into large sums of debt to attain this home can lead to financial constraints in years to come. Look at the overall picture for the future and see if a starter home or fixer upper can help you attain financial wealth that leads to the purchase of the dream home.
Create a list that focuses on what are the most important must-haves in any home that is purchased. Bedrooms, bathrooms and lot size are often major factors that narrow down the home search. Make a list that breaks down the must haves, bonuses and undesired items and provide this to your agent to help narrow your search to what is available with the wants in the proper price range.
Focusing on the long-term goals and budgeting for the future are smart ways to improve financial wealth. Begin the search with these tips and move on to the lender process to complete the home buying process!