5 Steps To Homeownership

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Hi friends! Pep talk alert: 

It doesn't matter where you are right now. I don't care how far behind you feel compared to peers, your parents at your age or me. Someone will always be farther ahead, someone will have gotten lucky early on, inherited money or married rich. Whatever you're feeling is valid, but feel it, and then start taking baby steps (or adult steps) to where you want to be financially! I'm here to tell you that you don't have to be perfect with money. You don't have to save every penny and give up going out to dinner. Your version of financial freedom is waiting, and it might take work! But if you want it, you can have it. 

What is financial freedom to you? It could be as simple as not living paycheck to paycheck. Maybe it means that you lessen that ever-present tug of money anxiety. Maybe you can pick up the tab without mentally calculating your bank account. Maybe you can quit your job. Maybe you can travel like you say you want to. Maybe you can do whatever the f*ck you want. 

Obviously, I believe that buying a house (in the right way) is an essential step toward where you want to be financially. This post is for the people who feel so far from being able to take that step and need some guidance and support to get there. 

 

1. FIGURE OUT WHERE YOU ARE NOW

In whatever way works for you (mine is a google sheet), list out your assets and your liabilities. Assets are things that are building your wealth, such as your savings, any retirement account, stocks or owned property. Liabilities are things that are costing you money, such as student loans, car loan, mortgage, credit card balances etc. Subtract your liabilities from your assets and you're left with your net worth. If you're like most people, you will be in the negative. THAT'S OKAY! This will change once you identify ways to grow your net worth (buying property, investing in index funds, saving, paying down loans)

This is also a good time to figure out all of your interest rates. This will inform how you should go about paying things off. I make a very conscious choice to pay my highest interest rates first. For me, this is 1. credit card (YUCK credit card interest, no thank you. Read more below) 2. car payment (paid offffff, yes!) 3. student loans  

Another great money move is to figure out exactly where your money is going monthly. Without any self judgement, make a realistic expenses list. If you don't trust yourself to be realistic, check that credit or debit card statement! I use the app Personal Capital to track my spending. If you know where your money is going, you can make subtle changes to affect your monthly expenses. You don't have to give everything up, but identify the purchases that aren't bringing you real joy. 

If you love everything you're spending your money on and you don't want to cut back, identify a way to make more money. This was a powerful realization for me, because when I restricted myself, I started to get sad and stressed. When I realized that i could just make more money, the possibilities opened up. 

ACTION STEP: Create your net worth spreadsheet and identify your realistic expenses

 

2. CREDIT SCORE *rolls eyes, but then gets to work*

Time to check that pesky credit score. While credit score is a counter-intuitive tool used for oppression, it is convenient to understand and to have a good one.  I use Credit Karma to check mine, although I usually allow for a 10 point buffer because any time I've actually had my credit pulled it seems to be a bit lower than what Credit Karma says. 

To buy a house, I recommend having a 650 or higher. If you're above 720 you get an even better interest rate, but it's super hard for millennials to have impeccable credit scores due to this infinitely annoying credit score factor called "age of credit". Since we're all just now figuring things out, our credit is super young, and that factors into how high your credit score is.

Factors you have control of are where we need to focus. Derogatory marks (late payments, overdue balances, etc) hit your credit in a big way, so take the afternoon and figure out where you bad marks are coming from. Sometimes, all it takes is a simple phone call to the institution to clear it up, especially if it's a mistake or it's been a while. Sometimes it's that Gap Card that you opened to get 10% off and then you forgot about it and the $135 balance is racking up 21.99% compounding interest. 

Percentage of your credit used is a big factor as well. I have three credit cards. They all carry a small balance, but then I pay them off religiously every month. I've paid about $178 of credit card interest in my whole life, and I'm still annoyed by it. I also push the credit limit to the limit. I'm always requesting higher lines of credit because then my percentage usage goes down. You want to keep this number below 10%. So if your credit limit is $10,000 over all your cards, you want your usage to stay under $1,000. It's okay if it creeps over, but PAY IT OFF! DON'T SPEND WHAT YOU DON'T HAVE!

ACTION STEP: Sign up for a credit card! If you already have one, request a higher credit limit

 

3. EMPLOYMENT & qualifying for a mortgage

First, you should watch the movie, The Big Short. This will all make more sense after that. It outlines what happened around 2007 before and during the subprime mortgage crisis. 

Then, you need to make sure that your income is the correct type, the correct amount, and that you've been there for long enough. There are wild amounts of rules and regulations in place to keep another crisis from happening, which is good, but also annoying and confusing.  

If you have a full time W2 income job where you receive a regular paycheck, obtaining qualification for a mortgage is simple, provided your income is high enough and your debt is low enough (more on this later). Mortgage companies need to see that you've been working at some w2 job for at least 2 years, or that you had a reason why you wouldn't be working. For example, I bought my first house a year out of college, and the mortgage company accepted the excuse that I was in college, therefore I would not have two years of employment history. 

If you are a contract worker, freelancer, service industry employee or anything other than a w2 employee, it gets complicated. Basically, you'll show your tax returns from the past two years and you'll take the average monthly income over those two years, provided you've been doing the same type of work for that long. If you've only been freelancing for 1 year, you won't show any income, which means you won't qualify for a mortgage. It just means you'll need to wait a year, which is not the end of the world. But still, WOMP. 

Taxes and freelancing/contract/etc is tricky. You don't want to give all your money to Donald Trump (that's how taxes work, right?), but you also need to show that you've earned an income for the past two years. If you are planning to buy a house, you need to take this into consideration come tax season. Getting a big tax return is awesome, but showing that you made some money and that you can pay for a mortgage is imperative. It can be a huge roadblock in purchasing a home, so plan ahead! After you purchase, you can go back to getting a fat check from Uncle Donald Trump. 

ACTION STEP: Figure out where your employment falls and make sure you can prove that you've made a good income for the past two years. 

 

4. Debt to Income Ratio (DTI) & qualifying for a mortgage

Debt to income ratio is a big piece of the puzzle when planning to buy a house. It is exactly what it sounds like: how much debt you have compared to how much income (documented and proven) you have monthly. Your DTI must be below 50% with your mortgage, taxes, insurance, student loan debt, car payment, credit card payment, etc. 

Your DTI will dictate how much house you can afford. If your income is $5,000/month before taxes, and you have $250 in student loans, your monthly payment can be up to $2250 including mortgage, taxes and insurance. Depending on how much you put down, your interest rate, your property tax rate and your specific loan, this is about a $300,000 house. 

This should be simple to calculate for yourself. If your DTI is a bit too high, identify the necessary steps to lower it. Pay off your credit card or your car. Ask for a raise at work! If you're clueless as to what to do next, I can help ID your next steps.  

ACTION STEP: Figure out your debt to income ratio by using the list of your monthly expenses that you should already have from the action step above:) 

 

5. Down payment

This is the one everyone is afraid of. Saving money is hard when you're paying $500 a month in student loans and trying to live a fun life in a fun city because you're young and free. I get it, seriously. I've never been great at saving. I have been great at being scrappy and figuring stuff out. 

First, figure out how much you'll realistically need. This will depend on your city's housing market, your desired area and how much you can afford. Putting 20% down on a mortgage is so 2014 (unless you have it and you want to sink that much money into your house, which some people do). The downside of putting a lower percentage down is that you'll need to pay mortgage insurance for a while until your loan to value ratio is 80% instead of the 95% (assuming you put 5% down). In my opinion (NOT A FINANCIAL ADVISOR OR A LAWYER), you should either put 20% down or the very lowest that you can. First time home buyers can put as little as 3.5% down (take advantage!!!). Don't forget to factor in closing costs. A good solid estimate is around $6,000 on top of the down payment. This will depend on your market as well. Sometimes you can get the seller to pay for these. 

You've already figured out how much you have saved in step 1. If you don't have a big chunk of liquid cash, assess your options. Maybe slowly saving money is your only option, but it probably isn't. If you have old rich people in your family, awesome. Hit them up for a gift (informal loan, whatever they and you are comfy with). My grandma helped me build my financial success and she is SO thrilled about it everyday. She consistently tells me how proud she if of me and how impressed she is that I'm paying it off so quickly. You need this validation in your life from your grammy too. 

Otherwise, take advantage of the first time home buyer programs! Do some research. Figure out the qualifications in your state and then get to work finding out how to make it work for you. It's worth the time, and you'll probably find out that it's easier than you think. 

This also may look like waiting a while. If you need to save up, make a plan! Figure out how much you need to save and then work backwards. Find ways to cut back on expenses to raise your savings rate so that it happens sooner rather than later because the best time to buy real estate is yesterday. 

ACTION STEP: Figure out what you need to do to cover your down payment and closing costs. MAKE A PLAN!

 

If you don't want to read all my rambling words, here are the action steps in order: 

  1. ACTION STEP: Create your net worth spreadsheet and identify your realistic expenses

  2. ACTION STEP: Identify ways to raise your credit score. Sign up for a credit card! If you already have one, request a higher credit limit

  3. ACTION STEP: Figure out where your employment falls and make sure you can prove that you've made a good income for the past two years

  4. ACTION STEP: Figure out your debt to income ratio by using the list of your monthly expenses that you should already have from the action step above:)

  5. ACTION STEP: Figure out what you need to do to cover your down payment and closing costs. MAKE A PLAN!

I really love helping people with this, so please reach out if you'd like some guidance. Even if you're not yet in a position to buy, I can help you ID some next steps that are personal to you. If you have any friends, sisters, nieces (or brother or nephews, of course) who need financial help without the pretense, send them my way! This isn't taught in schools, so we need to trudge through all this information together.