Written by When you are looking to purchase a home, it is not as simple as what are you preapproved for. By financial planning for purchasing your home, you will gain the understanding needed to recognize the true financial impact of the decision. A comprehensive financial plan will look at the purchase of a home and the impact it is going to have on your life and financial goals. You don’t want to purchase a semblance of freedom at the cost of your freedom.
When you meet with a financial planner, they’re not just going to be telling you how much home you can buy. That’s what a real estate agent’s generally going to tell you. Now, they do take into consideration through underwriting, whether you’ll be able to make the payment. So don’t get me wrong there. But a financial planner is going to be looking at the purchasing of a home within the effect and the impact it’s going to have on your overall financial goals and your life goals that you have set for yourself.
#1 question when financial planning for purchasing your home
Instead of it just being a question of, how much house can I afford. It’s a question of, how much house should I get, so I can maintain my current commitments to my future goals? Another way to think of that is, if you’ve already said I’m going to be investing 10%, 15%, 20% of my check every single month, that is going to go towards my freedom plan. Whether that’s just financial freedom or traveling or whatever it is that you have set as a goal for yourself. Then if you say, you know what, Dre, I have to drop that commitment down to 5% to be able to afford this home. Well, that question by itself is one that now you’re thinking, should I do it? Does that still make enough sense for me?
What I want us to do is just to take a step back and to say, okay, I understand why I want to buy a house. Buying a house, we feel like we living the American dream. We feel like we are succeeding in different ways. Maybe your parents and your friends all want you to get a house. You or your spouse could be the ones looking to purchase a home. For many, owning a house has become a symbol of success. Since I have this house, you can only assume things are going well for me.
Count the cost
When you look at financial planning for purchasing your home, it refocuses you on what matters most. We’re not trying to get semblances of freedom at the cost our freedom. We are looking to achieve actual freedom. Freedom to choose what you do, when you do it, how long you do it, and who you do it with. Supporting causes you believe in. Working on your passion projects. Not necessarily working for a paycheck. When you look at a house, that is a semblance of freedom and it could come at the expense of your freedom. To make sure that you’re not making that decision, there’s a few questions that you’ll discuss with your financial planner that I think will benefit you today.
1. 10-20% for down-payment
Do I have the 10 to 20% saved up so that I can purchase this home? There are situations where you can get a home with FHA for 3%, but wouldn’t it be better if you could have up to the 10%. Even if you decided to go with the 3% FHA, one of the benefits I believe of going to the 10% or 20% is you’re training yourself to say, I save for savings sake. You don’t want to be someone that’s in a habit of saving to purchase something. Then you spend all of the money and it’s all gone, and you have to start back over from zero.
On that note, it’s also important to make sure do I still maintain my emergency fund? You do not want to be spending your emergency fund on purchasing a house. We’ll go into some of the expenses of being a homeowner later in this episode, but you don’t want to spend your emergency fund. It is for your emergency. If something were to happen where you have a medical expense or you were to lose your job, or once you have a house, you have certain expenses. Like my AC goes out. I live in Florida. When my AC goes out, it is a big deal to make sure that we get that back connected as soon as possible. to fix it.
2. Have enough life insurance from Day 1
Make sure that you have a contingency plan. If there is any sort of an emergency when you first purchased the home, one example would be what if we’re approved for this home based on two incomes and something happens to one of us. We would end up having to sell the house and move all while dealing with the loss of our spouse or loved one. Wouldn’t it make sense to go ahead and get enough life insurance before you close on the home?
Make sure if something happens to one of you, then the house is able to be paid off and then you don’t have to worry about moving while you’re dealing with the grieving of you loved one. These type of questions and situations are ones that most financial planners will have at least been trained on or experienced personally when it comes to financial planning and ensuring that they make sure their clients are able to maintain the strides that they have achieved over time.
3. Maximize your mortgage payment
You may also want to consider what would a 15 year mortgage look like? Not saying that you have to get it. In fact, if you are financially responsible where you work with a financial planner, or you just already are very good with your money, then I would say, get the 30 year, but go ahead and make the payments based on a 15 year. Let’s say we have a 30 year mortgage and that payment is a thousand dollars. Let’s say if you were to have a 15 year mortgage, just to make the math easy for me, that that would be $1,500 a month.
So instead of setting up your mortgage as a 15 year, where you have that $1,500 month payment, where you have a percentage of that money, that’s going towards principal and you have a percentage of that money that’s going towards interest. Go ahead and set it up as a 30 year mortgage at a thousand dollars. Then you have a thousand dollars as going towards some principle and some interest. And then the extra $500 that you pay each month is going straight to principle. It is not being calculated in your interest in fees and taxes and so on. It’s going to help you by making the exact same $1,500 a month payment that you would if you had a 15 year, but you have such a smaller portion. That’s actually going towards the interest and you have a significant amount more that’s going towards your principal.
Be honest with yourself
This only works if you are responsible in the sense that you set it up automatically, or you trust yourself to be able to make that 15 year payment, even though you’re not obligated to do so. Another benefit of being obligated to pay a 30 year mortgage, but you’re making the 15 year payments is if something were to happen. If you had some sort of a financial emergency, you could take off a few months where you just make the thousand dollars payment, and then you have that extra $500 cushion that you can then allocate towards whatever that emergency was.
4. Limit percentage of income mortgage covers
Another thing that you’ll want to consider is when you’re making your overall budget, you don’t just want to be able to say, well, I can afford this much house, I can get it. Realistically, you don’t want to be spending more than 25% of your monthly income on your mortgage. You also don’t want to be spending much more than about 35% of your income, as far as the budgeting, when it comes to the different expenses that you’re obligated to on your credit report, most underwriters are going to be looking at that. I’ve seen instances where they will go up to as much as 30% where you can spend that on a mortgage.
I would actually prefer you to be in that 20 to 25% range. If you are at 25% of your check, what will end up happening is you get paid, let’s say twice a month. You get paid on like the 15th and the 30th. If you get paid on the 15th, you have half of your month’s income. Well, half of that will go towards your mortgage. So you have the other 75% of your income, at least that you then can allocate towards your other expenses, your investments, your freedom fund, traveling in different things that you want to do with your family. If you start creeping up to 30%, 35% of your income is going towards your mortgage payment, then you’re usually not able to allocate any money towards your investments and your freedom.
It has to come from somewhere
That is a lot of your money is tied up in your house. Once you pay the taxes and the insurance. And whenever you have unforeseen events that happen where someone runs over your sprinkler, or you have a window broken, or you have squirrels that chew holes in your roof, all sorts of crazy things end up happening. And you don’t have the freedom of income to be able to allocate towards it. Now you have to pull the money from your emergency fund. Now you have to pull back on your investments because you’re trying to maintain your house in these different unforeseen events.
5. Money for closing costs
In addition, make sure in your financial plan for your house, that you have money set aside for closing costs. Now closing costs generally are somewhere between 2% to 5%. If you were to buy a $100,000 house, you would expect to have $2,000 to $5,000 in closing costs. When the house costs $200,000, you would expect to have $4,000 to $10,000 in closing costs. If your house costs a million dollars, you would expect to have anywhere from $20,000 to $50,000 in closing costs.
6. Calculate ongoing cost of owning a home
Also, don’t forget to plan for your new and ongoing expenses, whether that is tied to the fact that you have to pay someone to help you move, whether you want to paint the house and change the colors, need to update the appliances, whether you planned to update the appliances or the appliances broke as you were moving in. However, that looks let’s go ahead and make sure that we’re not finding ourselves between a rock and hard place, because something requires money that we didn’t think of ahead of time.
By looking at the age of your house and the age of the appliances, you can calculate how long something should last. They generally tell you that; hey, you can expect this oven to last for 10 years. You can expect your TV to last for 50,000 watch hours. They give you different numbers of what you should expect. If you plan to replace it before that time, then you put yourself in the best situation. By allocating your percentage of your budget towards ongoing expenses. Whenever something happens, you just go into that part of your budget to be able to replace it.
Be intentional with your money
Whether you have $50, $100, $500, a $1,000 a month, whatever it is based on the expenses in your house. When you put that money aside each month, as things break, you have that fund already set up. If you’re going to make sure that you have the house and you want to make sure that it doesn’t change the way that you allocate the rest of your money, then you need to be intentional with your money. We can’t say I’m just not going to have any of these issues
If you don’t want to allocate a percentage of your income to home repair each month, look into getting warranty insurance. I have never personally had a good experience with it, but I know people who swear by it.
7. Create your budget and begin saving
You’re ready to calculate your budget and begin saving. If you want, you can open up a RightCapital account for free. If you go to ObsidianWisdom.com, I have it available where you sign up for your free financial planning account. Within RightCapital, you can put in everything from your family, member’s names, to your income, your expenses, your financial goals. And then it’ll even calculate how much you have as your net worth and how much you’ll need to save. From there, you’ll be able to get a snapshot of where all your finances are.
- Then you can say how much money you want to allocate towards your home?
- How much money that you want to allocate towards your emergency fund?
- How much money do you want to allocate towards your debt and your expenses?
- How much money do you need to allocate towards the ongoing expenses of having your home?
By having a financial plan in place for your house, it’s going to eliminate the worry that you’ll have when it comes to, can I afford this house? Should I get this house? Do I have enough money to be able to pay my other bills? Where am I going to get the money from? You’re going to have the answer to all of these questions.
Final thoughts
When you meet with your real estate agent and the underwriters, you already know what you’re looking for. You can’t be talked into spending a little bit more because you already know exactly what that would mean. It’s not a question of whether I’m just going to be spending another $50 a month. Even though that is often how it is portrayed to you. It’s really a question of, do I still have the money to spend on my life and financial goals? Do I have the wiggle room in case the house increases my transportation costs? Can I survive if my appliances start to break? Do I have the life insurance to cover the additional home? You see? Financial planning for purchasing your home is so much more than – can I afford to spend an additional $50 per month. It’s all about balancing your ability to maintain your lifestyle, while funding your future goals.
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