for Every Homebuyer
Fire Your Landlord:
Why You Should Buy
From 1985 to 2020, inflation-adjusted US median household income has shown an increase of approximately 35%.
The increase in national median rent prices for the same time period amounts to 149%.
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In 2021, rent prices soared by a record 11% according to the research firm CoStar Group. We'll take a safe bet that these numbers make your landlord quite happy. Millennial and Gen Z renters are predicted to spend, on average, $200,000-$226,000 per individual on rent in a lifetime. This number is set to worsen as a turbulent housing market emboldens landlords and enhances their ability to raise prices.
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Making the move from renting to owning is a process as difficult as it is rewarding. This particularly holds true for a new generation facing record rent prices and costs of living that steadily restrict the ability to save. Yet after the hard work and sacrifice expended to place yourself in one of the most reliable wealth-building vehicles in the US, you will have an enormous upper hand against many of these economic vices. Let us outline the benefits of ownership and how you can forge a path towards your own receptacle of generational wealth.
While the benefits of homeownership are clear, so are the difficulties of accessing it. At first glance, the amount of savings and income required to purchase property may seem overwhelming. It absolutely is possible that your finances nor your lifestyle are ready to accommodate a milestone as monumental as a home purchase. However, if you are determined to work your way towards grabbing a place to truly call your own, know that there are strategies besides simply strict budgeting that may accelerate your progress towards the goal posts. Here's a rundown of some potential avenues towards preparing for a home purchase.
House Hacking
House hacking is an effective strategy for affording home payments as a new homeowner, especially for young professionals seeking to purchase in areas holding a high concentration of other young workers. It can be summarized neatly as purchasing a home as your primary residence, while renting out empty bedrooms or unoccupied units to friends or like-minded tenants in order to partially or fully offset your monthly mortgage payment. While often used as a safer way to begin one's career in real estate investing, it works just as well for first time homebuyers who are comfortable with sharing their property to reduce housing costs. This strategy is not without its downsides though, as becoming a landlord carries a high level of involvement.
Down Payment Assistance
Many states, counties, cities, and even employers offer down payment assistance programs that can provide a portion or the entirety of the required down payment for a home loan. A great example of this is the CalHFA Equity Builder Program, a loan offered to eligible residents of California. This program provides up to 10% of the home's appraised value or purchase price, whichever is lesser, as a 0% interest second mortgage that is fully forgiven after 5 years of residency. Keep in mind that down payment assistance programs typically have income limits to restrict funding access to those who need it the most. With that being said, these income limits can be quite high and very inclusive. Ask us to check out which programs you may qualify for.
Fixers as a First
Purchasing a turnkey condition home in today's housing market can be costly and difficult for many first time homebuyers to afford. Fixer uppers can present a shortcut to homeownership for those who are meticulous and careful in planning and willing to get their own hands dirty to a certain extent. Extensive home repairs involving critical areas such as plumbing and wiring should always be performed by a licensed professional contractor. There are several loan programs that allow homebuyers to finance the cost of eligible renovations and repairs into their mortgage, greatly reducing up front cost barriers and granting additional flexibility (as well as significant savings compared to using high-interest debt such as credit cards or personal loans to finance repairs). The FHA 203k Rehab Loan and Fannie Mae's HomeStyle Loan both offer additional financing to cover major repairs and renovations after your purchase. Be prepared to extensively research the type of work that would make your home "complete" and truly determine whether you are financially and personally capable of carrying such repairs to completion. If you are, a fixer might just be for you.
Cosigning & Gift Funds
We recognize that not all will be able to solicit the help of family or friends in the homebuying process, but we want to ensure that prospective home buyers understand that these options exist and should be considered if needed. For those who cannot present adequate income history themselves, but understand that their income is sufficiently large and stable enough to support a mortgage payment in addition to all other necessities, having a cosigner could be a great option that opens the door to ownership. A cosigner's income, credit, and debts are added to your loan application when cosigning, so be sure to weigh their credit health and monthly debt obligations to ensure whether their status as a cosigner will benefit your chances of approval. Gift funds from family or friends can also be used to help those who are seeking to gather more funds for a down payment and to offset closing costs. In some cases, usually when you intend to purchase a primary residence, gift funds can comprise your entire down payment amount. In other cases, the borrower must typically meet a minimum requirement for their own personal contribution. Contrary to common belief, while the individual gifting funds must report gifts above a certain dollar amount to the IRS, this may not result in additional taxes unless your total gift history exceeds the maximum lifetime limit of over $11MM as of 2022. However, you should always consult your tax preparer to understand tax implications of gifts.
401k Retirement Loans
If you find yourself in need of down payment funds to purchase a home in the immediate future, and you have built a substantial 401k retirement account, you may be able to draw funds penalty-free from your 401k using a 401k loan. Typically, early withdrawals from your 401k (before age 59½) result in a 10% penalty levied by the IRS. With a 401k loan, you may draw up to $50,000 without penalty in the form of a loan that must be repaid each month with interest. However, the interest you pay on a 401k loan goes back into your account, so essentially you are paying yourself back. The payments for a 401k loan also do not cause negative imbalances for your debt to income ratio (DTI), as you are the creditor and the recipient of your 401k loan payments. Bear in mind that this is not offered by all employers, and that requirements and loan structures may very depending on employer policy. You also will not be able to contribute to your 401k until your 401k loan has been repaid in full. Switching employers while there is still outstanding 401k loan balance will not rid you of the debt, and may actually shorten your period to repay the loan significantly. If you do not repay the loan, the loan proceeds are classified as an early withdrawal by the IRS, and will be subject to the 10% penalty. Carefully consider the benefits and drawbacks of this option before making any commitments.
Long-Term Preparation
The above strategies can prove useful for those who are looking to make a purchase fairly soon, with methods geared more towards a purchase in the immediate future. For those of you who aren't necessarily looking to purchase anytime soon, but correctly believe that preparing as early as possible will greatly benefit your chances of entering into homeownership, here are some long-term tips you should keep in mind as you plan for your future.
Credit History
Credit history is the most important factor by far. If you take a look at our loan program page, you can see that even when it comes to income history, there are solutions to various commonly-encountered roadblocks. However, your creditworthiness is of paramount importance to a lender; they will absolutely scrutinize your history of honoring the debts you incur. It is already well known that credit scores affect the pricing that you qualify for, but they can also affect anything from the required down payment percentage, required funds in reserve after closing, or eligibility for the loan program itself. Making sure that you establish excellent credit history as early as possible will greatly aid you in the mortgage approval process.
Savings & Budgeting
It sounds obvious, yet a lack of cash on hand tends to be one of the largest problems faced by prospective homebuyers when laying down the foundation for a home purchase. If you are serious about entering into ownership, you can begin the journey of a thousand miles with a single step that starts with forming a simple (and realistic) monthly budget. After accounting for mandatory expenses, your preferred lifestyle expenses (since no home, or no purchase for that matter, is worth being miserable for), and how much you actually spend currently, see what costs you'd be comfortable with cutting. Small things add up quickly, and small sacrifices can result in large achievements over time.
New Responsibilities
If you are a renter, chances are that you are not responsible for much more than the condition of your own designated space of your apartment. If appliances fail, or basic utilities suddenly cut off, your landlord's responsibility to you as a paying tenant will absolve you of the need to make any repairs (or finance any repairs) on your own. However, there is no such convenience when you own your own property. This section is not to tell you that you should go and pick up a few skills in basic home improvement (though by no means would this be a bad idea). This is to inform you that ownership of a home is accompanied by a significantly higher level of responsibility than renting a unit. Tens of millions of homeowners have adopted these responsibilities just fine, embraced them even. But it is important that you understand the change in how you will need to ensure the upkeep of your living space, and that you are aptly prepared for said changes.
New Opportunities
Don't be afraid to dream big! The home purchase process isn't all monotonous preparing or aimless budgeting and prep work. Think about what you'll want to see when you walk into those doors. How many bedrooms? How many bathrooms? Granite, marble or tile countertops? Basement? Attic? Color palette and home décor? In state or somewhere new? What memories will your four walls enshrine? This will be a space that is truly and entirely your own. Experiences of a lifetime will unfold within it, and it is absolutely something you should start forming a vision of in your mind's eye. With the right strategies and approach, you can realize that vision sooner than you expect. Let the professionals at HP Mortgage make sure that your journey to your keys is as efficient, safe, and low-cost as possible.
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