How To Manage Stress When Dealing With Home Financing
One excellent way to improve your financial profile is to buy a home of your own. But we won't lie: It's a long and potentially incredibly stressful process, especially when it comes to the dollars and cents of securing a mortgage loan. So how do you navigate the stress of the journey in order to reach Destination Homeowner? There's a lot that's within your control to help ease some of that stress and make the whole thing a little bit easier. If you take a few steps upfront to manage the financial details early, you'll thank yourself on moving day. Get pre-approved for a mortgage Getting your mortgage loan is arguably the most labor-intensive aspect of buying a home. You'll have to submit documents that show your income and expenses, including tax returns, bank statements, pay stubs, and more. A mortgage pre-approval is much more involved than its lighter cousin, the mortgage pre-qualification. But a pre-approval will help you understand exactly how your new home will fit into your finances and whether you can even afford the house you're currently touring. Some buyers make the mistake of getting pre-qualified for a mortgage, making an offer on a house they love -- and then discovering once they submit all the paperwork that they can't actually get a loan for that amount. Sound stressful? It is. Avoid that all-too-common scenario by taking care of the hard part early: Talk to a mortgage lender and get your pre-approval lined up so that when you do find a home that you could call your own, you can place an offer on it then and there without needing to wait for approval from a bank. Pick the best mortgage for your situation All mortgages will help you buy a home, but not all mortgages are created equal when it comes to your own personal financial profile. If you know you're only going to be in your current city for two or three more years before pursuing a career change elsewhere, for example, then maybe a 30-year fixed-rate mortgage is the wrong choice for you. You could build more equity in a shorter period of time with a 15-year mortgage, and an adjustable-rate mortgage might give you a more competitive rate for the time you'll be in the home. Conversely, if you are planning on digging in and staying for a while, then a 30-year fixed-rate mortgage might be exactly what you need. If you're a veteran or a first-time homebuyer, then you might be able to access loans from a government-sponsored entity (GSE) like the Federal Housing Administration or Veterans Administration, both of which offer loans that don't require a full 20-percent down payment. And that might mean you can become a homeowner a lot sooner than you thought! A mortgage broker can walk you through your options and help you choose the mortgage that will work best for your current situation. Save as much as you can Even if you're securing a low-down-payment or no-down-payment mortgage, you should still expect some out-of-pocket costs that you'll have to shoulder before you can start paying a mortgage instead of rent. Depending on the sales contract, buyers will likely have to pay for the appraiser and the inspector to look at the house and (respectively) appraise and inspect it. A seller might request earnest money in order to accept an offer, so buyers will have to provide that. Necessary repairs to the house might be taken on by the buyer in order to expedite the sale, so that's another possible expense to consider. There are closing costs that need to be paid to the title company upon closing, and if a buyer wants to purchase title insurance to protect the sale, that's an additional expense, too. And don't forget about the cost of moving -- you'll need time off work and a truck at minimum, or to hire your own movers. Then once you move in, you might need to pick up some new furniture or other items for your new space. If you're starting to get the idea that there's no such thing as saving too much before you embark on your home sales journey, then you have the correct impression. Don't let those costs sneak up on you; be aware of them and budget for them so you're not worried about how you're going to get it all done. Research before you bid If you've found a home that could be yours and you're ready to make a bid, stop and think before you decide on a number. You might think that offering the seller's asking price is a perfectly safe move to make (and it might be), but how will you feel when you learn that most sellers in the area are negotiating down from their listing price? (Here's how you'll feel: Like you left several thousand perfectly good dollars on the table that could have been yours.) And offering less than asking price could also be considered a safe move in some markets, but in others, you might have priced yourself out of consideration from the opening bid. A good real estate agent can explain your local market trends and help you come up with a bid that works with your budget and will be seen as serious and competitive by the seller. Agents can show you whether houses in the area have been selling for below or above the asking price and can help you find that sweet spot where both you and the seller are happy with the deal. If you can follow these four suggestions, your home purchase process will be a relative breeze -- and your stress levels will stay under control. You'll be glad you took the steps to smooth your path a little bit once you've finished the journey.
Can you buy a house before you turn 21?
There's a general worldview that the younger generations will never be able to achieve homeownership because housing values have outpaced wage growth for decades. This is absolutely true, and we're not downplaying the seriousness of affordability issues ... but, actually, you can become a homeowner well before 30. In fact, if you want to, there's little to stop you from buying a house before you turn 21; you can legally obtain a mortgage loan at 18, though your ability to do so isn't at all guaranteed. Is that really for you, though -- and how would you do it? Ask yourself these questions to determine how ready you are to buy and start taking appropriate steps to get there if you decide it's right for you. Are you going to stay in the same area for at least a couple of years? Unlike rent, homeownership isn't a lease you can cancel after a few months so that you can move on to greener pastures. You'll be paying a mortgage for at least a decade, if not three decades. You can, of course, sell your house before it's totally paid off, but you'll discover that selling a home is much, much more involved than finding a new place to live, packing, and moving. And it won't necessarily happen on your timeline; it could be months after your house goes on the market before it sells. As a general rule of thumb, don't buy a house if you think you might leave the area in the next two years. If you don't live in the house for at least two years, and there aren't certain extenuating circumstances surrounding your move, then you'll have to pay capital gains taxes on the property, which could potentially wipe out most or all of the equity you build in two years. How is your credit? You can get mortgage financing for a house with a credit score as low as 580 through some government programs, but the higher your credit score is, the better deal you're going to get on your mortgage terms. The best mortgage loans have low-interest rates, and lenders will offer you lower interest rates if your credit is good. This can actually be one of the biggest prohibitions for young aspiring homeowners. Credit is built over years, and if you weren't able to start building yours before you turned 18, you'll have a limited credit history to reference, which could mean less desirable loan terms -- or no mortgage loan at all. Many mortgage brokers can refer you to resources that will help you build or repair your credit. Do whatever you can to increase that credit score number; it'll pay off, literally, later on. How much money do you have saved? Next to the credit score, a lack of savings is another giant roadblock to getting a mortgage. You'll probably have to put at least a little bit of money down on the house because most mortgage loans require at least 3.5 percent, and 20 percent is ideal; with a 20-percent down payment, you won't have to pay private mortgage insurance, which can save you thousands of dollars over the years. That said, saving up a full 20-percent down payment is incredibly difficult if you're trying to do it before you turn 21. It may be a better financial move to save whatever you can and pay the mortgage insurance; on many conventional loans, the mortgage insurance disappears after you've acquired a certain amount of equity in the home. What can you afford? Many first-time homebuyers are often surprised to learn what they can afford to buy -- they might have been able to buy years ago if they'd only known! So don't assume that you can't buy a house just because you're young and haven't reached your full earning potential. It's entirely possible that you could be pre-approved for a mortgage loan today. But that loan might not cover the house of your dreams. You'll need to get a good idea of how much you can afford to spend on your mortgage every month, what that means for the range of home prices you want to consider, and whether that price range makes sense for your metro area. Where can you afford it? Within metro areas, there is often a wide variance in price range. You have your entry-level starter homes and your massive estates, and all the homes in between, typically grouped near other homes like them. Maybe you've got your heart set on a certain neighborhood that's simply unaffordable for you right now, and the neighborhoods where you can afford to buy don't appeal to you at all. This may be the point where it's beneficial to talk to a real estate agent. They buy and sell homes all over your area, and it's quite possible they know about nooks and areas where you can afford and where you'd actually like to live -- and that you had no idea existed. Do you understand the additional costs of homeownership? Your mortgage loan is going to include both principal (the balance of the loan) and interest (additional money charged for borrowing). But some buyers don't realize that it also includes taxes and homeowners' insurance, all packaged into one payment. This means that to truly understand what your monthly payment will look like, you might need to get some quotes on homeowners' insurance from a local insurance agent and research property taxes. Some online affordability calculators have some of these metrics baked in, but they aren't always accurate -- especially insurance rates. So double-check them before you decide to trust them. Is your household going to grow anytime soon? This doesn't necessarily mean getting married or having a baby; maybe you want to get a dog in the near future. If you think you might be making changes to your household in the next few years, wrap them into your home search. That way you can ensure you're buying a place that will grow with you, so you can be comfortable there for the immediate future and then some. Can someone help co-sign? One solution to the problem of low or no credit and a low down payment is to have a parent or other family member co-sign on your mortgage loan. This is a huge favor to ask, and you should be aware that if you default on your loan, your co-signers on the line for whatever you owe. It's not something to ask or give lightly, and if someone does offer to co-sign for you, make it your top priority to pay your mortgage on time so that you can preserve that relationship for years to come. Are you set on a single-family home? For many young buyers, a single-family home with a yard might not make the most sense. If you want a place of your own, looking at townhomes or condos, or even a multi-family property like a duplex up to a four-unit apartment building, could be a much better decision for you than holding out for a single-family house. If you're in a townhome or a condo, you are still building equity that can be leveraged if or when you do decide to move up to a house in the future. And if you have the ability to purchase a building with multiple units, you could wind up paying off most or all of your mortgage by renting out the additional units. (And you'll still get all the advantages of living in your property, including lower rates on homeowners' insurance.) Could you rent out some rooms to help pay the mortgage? Even if you can't afford to purchase a building with multiple dwelling units, maybe you can get a place that's a little bigger than you'd need on your own and rent out one of the bedrooms to a friend. That way you could supplement your mortgage, or possibly pay it off entirely, with rental income. Some homeowners vacate on weekends to rent their places on Airbnb, which could be another option for you. How stable is your life in general? If you're prone to changing jobs frequently, wanderlust, and generally don't have -- or want -- a lot of stability in your life, homeownership might be a big stretch for you right now. It's OK to put the goal on pause if you're not sure you'll be able to achieve it immediately; just wait until things settle down (and work on that credit and savings in the meantime!).
Is Rent-To-Own Ever Worth It?
Rent-to-own agreements have a bad reputation in the real estate industry, but is it deserved? Well, it depends. There are many different kinds of rent-to-own agreements, and each one can be modified and customized for the tenant and the landlord. Many rent-to-own agreements overwhelmingly favor the would-be seller of the property, the landlord, which is one reason why they have the reputation they do. What do you need to know about rent-to-own agreements — and could it be worth it for you? The rent-to-own basics In a nutshell, the way rent-to-own works is that tenants agree to pay additional money in rent every month in exchange for the opportunity to buy the house. There are a couple of different ways these agreements can be structured, but they always boil down to above-market-level rent so that the tenant can start building some equity in the home. This can be problematic simply on its surface. For tenants who struggle to save up enough money for a down payment, it might not be at all easy to spend several hundred dollars every month on top of their rent value. On the other hand, tenants who can’t manage to save a down payment might find that this is actually a better option — the money is going somewhere they can’t touch it, and when the time comes to buy the house, it’ll already be there waiting for them. Lease option and lease purchase agreements There are two essential types of rent-to-own agreements, a lease option agreement, and a lease-purchase agreement. Of the two, the lease-purchase agreement is more legally binding: If you sign one of these, you are obligated to buy the house when your tenancy is over. In a lease option agreement, however, you have the option to buy the home when your lease is up — but you are not required to. These agreements will also include details about the home purchase. Sometimes a lease option or lease-purchase agreement will go so far as to state the sales price of the home when the tenant’s lease is up, either based on the home’s current market value or calculated as a projected value. But other agreements specify that the home purchase price will depend on the real estate market when the tenant is actually ready to buy. In both of these lease agreements, the tenant is responsible for securing financing for the home purchase once the lease is up and the tenant is ready to buy. This means that if you sign a rent-to-own agreement and you aren’t able to get a mortgage loan when your lease is up, you may forfeit all of the extra money you paid throughout your tenancy. The cons for buyers There are a few big red flags that buyers should look for in any rent-to-own contract. And if you’re seriously considering buying a home like this, do lots of research on the seller. You don’t want to find yourself at the mercy of a shady person with unethical business practices because you were too excited to own a house to do any due diligence. Buyers will have to pay an additional upfront fee for the opportunity to buy the house at a later date. Often called option money, this money might or might not apply to the equity in your home, and will almost definitely be lost if something happens and the deal falls through. One thing that buyers need to think about is maintenance clauses. In many rent-to-own agreements, buyers are responsible for maintenance and repairs on the home during their tenancy. This might not be a big deal if you have to get a window air conditioning unit fixed, but what if there’s something wrong with your water heater or your sewer main? Or your fuse box? Those repairs can really add up, and you’re still not the owner, so you’re spending your own money to repair a house that you might not ever own. Another clause to keep an eye on is the one that outlines under what conditions the agreement can be broken. Often, if the buyer is late with a single rent payment, they lose all of their investment. And if the landlord isn’t in good financial standing and forecloses on the house, the buyer loses all their money invested then, too. This is why it’s important to research your landlord-seller. If they have a history of taking advantage of buyers, then you can probably find evidence of it. Ask them for references, and do your best to figure out what kind of person you’re doing business with. Lots of people who offer rent-to-own opportunities are ethical humans, but of course, there are always bad apples. And, of course, if something happens with your job or your family, and you have to move out of the area, you’ll have to break the agreement and leave your home (and investment) behind. The pros for buyers Many clauses in a rent-to-own agreement are negotiable, which means you can ask for things, too! You can request that your option money go toward your equity in the home, for example, or for the seller to maintain the big systems in the house while you’re in charge of smaller wear-and-tear items. So one pro is that if you know your rights and you're willing to work with your landlord-seller, you can come up with an agreement that works well for both of you. Another is that for buyers who want to own a home but aren’t quite financially ready, rent-to-own can really help you build equity and set yourself up to buy the house where you’re living in a couple of years. A rent-to-own agreement isn’t for everyone. It can be more expensive than buying a home the traditional way over the long term, and if buyers have the ability to save up a down payment and jump through all the hoops, they will most likely get a better deal on a house that isn’t a rent-to-own. But if you’re in love with the house where you live and it’s worth it to get your foot on the homeownership ladder that much sooner, it might be something you should consider.
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