What to consider (financially) before making the leap from renter to homeowner

This year has become a time for many to take stock–including when it comes to finances.

While some are reprioritizing savings goals or discovering new ways to grow their business, others are considering making the leap from renter to homeowner, likely due to the significant drop in mortgage rates over the past few months.

If you’re among those considering whether home buying is right for you, before picking up the phone to call your local realtor, first consider these three questions to ensure now is the right time for you (and your wallet) to take the plunge.

How stable are your finances?

Next to retirement planning, purchasing a home may be one of the largest financial investments you’ll ever make. Before jumping to take advantage of low rates, first examine how stable your finances are before adding on the responsibility of owning a home.

Is your industry or position prone to change based on economic conditions? Given challenges caused by the current health crisis, if the answer to this question is yes, it may be better to hold off for the time being. You’ll also want to take a look at your other financial goals and responsibilities, including your emergency fund, and general cash flow and savings.

With the unknowns associated with the pandemic, having an emergency fund – money set aside for the unexpected, such as a possible job loss or unforeseen event – is more important than ever. While the ideal number can fluctuate depending on your lifestyle, a good rule of thumb is setting aside three to six months’ worth of expenses, or even between nine to 12 months if these savings will extend to other members of your family. Having this built up prior to purchasing a home can help to provide a cushion in the event of any unanticipated financial changes.

Does your budget have room for a mortgage?

It’s important to remember that budgeting for a home goes beyond simply your monthly mortgage payment. You’ll likely be responsible for items that, as a renter, you didn’t need to build into your budget. And, if your wallet already feels tight, waiting could be the right decision.

A few of these costs to keep in mind include:

  • Home inspections: Inspections are sometimes required and can range from $200 to $700.
  • Property taxes: Depending on where you live, property taxes can widely vary. According to WalletHub, the average household spends around $2,279 per year.
  • Repairs: Although homeowner’s insurance covers some possible damages, there’s often no way to anticipate events like your air conditioner going out or water heater breaking. It’s a good idea to set aside an annual budget of around one percent the value of your home to take care of these ongoing maintenance needs however, bigger repairs such as a furnace or water heater could cost up to $5,000 to repair or replace.

Another important budget consideration? Making sure you’re committing to a housing payment you’re able to afford. Many people get pre-approved for a higher mortgage than is comfortable within their current budget, and sitting down with a mortgage calculator and a qualified mortgage

lender can help you to better understand what price limitations are best for you and your budget. By working with a trusted mortgage lender alongside a financial advisor, you may find that you qualify for special programs such as down payment assistance and better understand what type of mortgage is best suited for your situation.

What is your reason for buying?

While there is no harm in browsing, you’ll want one of the biggest purchases of your life to be backed with plenty of thought and rationale. I recommend meeting with your financial advisor, a trusted mortgage lender, and real estate agent to aid in this process. Ultimately, you’ll want to ensure that this decision aligns with your other short- and long-term goals, both personally and financially.

With the uncertainty this year has brought, it’s more important than ever to have support in navigating important financial decisions. Whether you’re an empty nester looking to downsize, or a growing family in need of an upgrade, a financial advisor can support you in determining whether purchasing a home is right for you, and the steps to make that dream a reality.

Trish Goska is a financial advisor with Northwestern Mutual. Trish can be reached at 303-300-5577 or [email protected]. Website: http://patriciagoska.nm.com/

What you should know about buying a home during a pandemic

The COVID-19 crisis has had a significant impact on the housing market, but the full effect may not be seen for another 12-18 months. As the economy ground to a halt in March, the housing market took a massive hit. Home sales dropped nearly 18% in April, according to the National Association of Realtors. This drop in sales drove inventory down as people grew reluctant to put their home on the market, further leading to price increases.

However, we are starting to see some positive indicators that the market is rebounding. As states and communities slowly reopen, homebuyers are entering the market again. By the end of May, mortgage applications were up 54% since early April, according to the Mortgage Bankers Association. And even with the dramatic spike in unemployment in March and April, the market is gaining surprising strength.

Buying a home is one of the biggest and most important financial investments you will make, especially in uncertain times. If you are in the market to buy or sell, here are some tips to consider.

Get preapproved

One of the first steps we recommend buyers take is to get preapproved for a mortgage. It’s important to know that loan prequalification is different from preapproval. The former involves only a cursory look at basic financial stats like your credit score, income and outstanding debt, but it is not an official agreement to extend a mortgage your way. The benefit of being prequalified is that it does not take as long to process compared to a preapproval, and it offers buyers a degree of flexibility. As a buyer, know that your lender may need to verify your employment several times through the homebuying process and some lenders may require higher credit scores to qualify for a mortgage.

Find an experienced real estate agent

In a competitive market with low inventory, buyers need as much help as they can get. Be sure the real estate agent you work with knows your city and area well enough to be of service.

Expect technology to play a big role

Be prepared to practice social distancing as you house hunt. Right now, there are not a lot of open houses and touring homes digitally is the new normal. Zillow reported a 408% jump in agents using its 3D home tour feature in March compared to a typical week in February of this year. Buyers and sellers should expect new policies and listing protocols from electronic closings to limiting in-person meetings to protect the health of everyone involved.

Be ready to make an offer

Even as home sales declined nationally overall with stay-at-home orders, the National Association of Realtors reported that the median existing-home price for all housing types in April was $286,800, up 7.4% from April 2019. In major cities, there has been less of a supply and more of a demand for houses in the past few weeks.

Anyone buying a home today should not only expect to pay more than usual but to be forced into a decision quickly. While everyone wants to get a bargain in any transaction, the nature of a seller’s market implies that homeowners do not even need to bother with low offers. If you find the absolute perfect home, be prepared to make an offer that’s over budget. Right now, with forbearance requests surging and possibly more foreclosures in the coming months, you might need to be prepared to put more money down as well.

Sweeten the deal to survive a bidding war

When two or more parties are competing for a seller’s approval, the result is usually a bidding war. It’s not as frightening as it sounds, but it can certainly be stressful without a skilled agent and some personal experience on your part.

To come out on top in a bidding war, Realtor.com suggests that you have a clean offer, which means few contingencies and compressing the contingency timeline. Cash is king, and sweetening the pot with cash can work wonders, but you might be surprised at the effectiveness of cooperation and flexibility. Buyers who can meet a seller halfway often come out on top, even without the most financial muscle. Having an experienced agent in your corner will help.

Selling could get harder, too

While the market now generally benefits anyone selling a home, there is a lot of uncertainty and a variety of unknowns in the current housing market. In many cities, buyers are still facing stiff competition due to housing shortages, but we don’t know how long this could last.

To alleviate at least some of the stress, buyers should make a list of priorities and stick to them heading into their search. Start the list with features that are absolutely needed, like a number of bedrooms or a two-car garage, followed by things that are nice but not essential. Sellers, meanwhile, should be prepared to juggle multiple offers all at once. This may also require a list of priorities of what to look for from an offer: Would you prefer to make more money on the deal? Or is it more important to sell quickly?

Real estate transactions have never been easy, and they are even more hectic during a global pandemic. However, if you do some preparation beforehand and stay up to date on state and local regulations, you could find that right now is still a great market to buy and sell in.