Starting the homebuying process can be like taking a crash course in a different language, especially if you’ve never bought before. There are so many unique variables and possibilities, it’s almost impossible to have a complete grasp on the intricacies of the real estate industry as a whole.
Thankfully, you only have to understand the aspects that pertain to your situation – and even that can be challenging. That’s why it can be helpful to work with a financial advisor, someone who can fill in the gaps and point you in the right direction. But just sitting down with an advisor isn’t enough. In order to get the most out of the relationship, you need to ask the right questions.
Here are the most important questions you can ask, with advice from industry pros.
When a person applies for a mortgage, the lender comes back with the maximum amount they’re approved for. Most lenders stick to the general 28/36 rule, which states your mortgage payment shouldn’t be more than 28% percent of your gross income, and your total debt payments shouldn’t be more than 36% of your gross income.
But those rules can leave borrowers with more money than they intended to take out. Banks are in the business of making money, and they can make the most money by lending more.
Lenders don’t know what other financial goals you have. They don’t know how much you have saved for retirement, your kid’s college education or your new business venture. They don’t know that you plan to have children soon and your spouse wants to become a stay-at-home parent.
Only an advisor who knows your specific situation can recommend a mortgage limit. Ask your financial planner how much home you can afford on top of your other obligations.
Marguerita M. Cheng, CFP® and CEO of Blue Ocean Global Wealth said she advises her clients to think about what they truly want in a neighborhood before they settle on a new house.
Do they want to be a five-minute walk from restaurants and coffee shops, or do they prefer a quiet suburban setting? Do they want a huge backyard with a pool or a small downtown condo? All of these preferences should be considered when buying a home.
“I counsel them to think about quality of life and what they value most,” she said.
Flexibility is one of the most important aspects to consider. If a couple has yet to have children and wants to start a family someday, Cheng reminds them to consider the school districts. If your lifestyle could change significantly in any way during your time in the new home, you need to plan accordingly.
If you’re transitioning from renting to homebuying, you’ve probably become accustomed to calling your landlord every time something’s broken. As a homeowner, you’re the one responsible for dripping faucets, leaking pipes and clogged drains. Not only does that take a lot of time (and trips to Home Depot), it’s also a huge money sink.
One of the biggest issues that new homeowners face is the inevitable repair they didn’t anticipate and budget for. This leads to mounting credit card debt, taking out a home equity loan or borrowing from friends and family.
Advisors will typically remind their clients to set aside an established amount every month for maintenance and repairs, usually between 1% to 2% of the home’s cost. Even if your home is brand new, it’s still good to save money for the day the roof starts leaking or the pipes burst.
Cary Carbonaro, CFP and Managing Director of United Capital, said one of the main things her friends don’t realize is how a home’s property taxes can change anytime and increase their monthly mortgage. When cities need new sources of revenue, they often resort to raising property taxes. Sometimes the increase is minimal, but other times it can be significant.
She had one friend who saw her property taxes double because the home was undervalued during its initial assessment.
“She got a tax bill where her taxes went from $10,000 a year to $20,000,” Carbonaro said.
If you renovate your home significantly, the home’s value could increase and subsequently raise your property taxes. This often happens to people who buy a foreclosure or a fixer-upper.
Most people think a conventional loan with 20% down is their only option for homeownership, but there are lots of ways to buy a house. Prospective buyers can choose an FHA loan with 3.5% down or a conventional loan with as little as 5% down. Putting down less overall will leave more wiggle room for any repairs or renovations that you want to make when you move in.
Ask your financial advisor and mortgage broker if they recommend an FHA or conventional loan. Depending on your circumstances, an FHA loan might be better than a conventional loan. If you can swing the higher down payment though, a conventional loan is a better option.
Buying a house is probably the biggest financial decision you’ll make, so it’s best to consult your financial advisor before becoming a homeowner.
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