Home Ownership

How to Buy Your First Home: 6 Steps to Find and Purchase Your First Home

Want to buy your first home? Home ownership begins with a plan!Home ownership continues to be an important part of the American Dream, and a top financial goal for many of my Generation X and Millennial clients.

Buying a home is both a significant financial and emotional investment, and in the San Francisco Bay Area home ownership is not always an easy goal to meet. With a median home price of $806,000, houses in our desirable neighborhoods may seem like a huge stretch, and when I show clients the numbers, discouragement often sets in.

After the initial shock wears off, I remind my clients that everything starts as a dream… but home ownership begins with a plan! Together, we work on a detailed, multi-year strategy to buying their first home.

Plan for Your First Home

The plan has several components:

1. Start a dedicated savings plan

Without financial resources, purchasing a home is impossible. Immediately start a dedicated savings plan for the down payment, closing costs, moving expenses, and home improvement & furnishings expenditures.  If relatives are willing to assist with the down payment, begin discussions about that now.

2. Check your credit score

Lenders won’t make a loan to people without good credit. Now is the time to pull your credit report, review for errors (mistakes are not uncommon…go over that report carefully!), and have it corrected if necessary. If your credit score is below 700, work hard to raise it: never be late on payments, keep credit card balances at 30% or below of the maximum limit, do NOT close dormant credit cards, and make sure to have more than two types of credit.

3. Get educated on mortgage financing

A great place to start is this excellent article, “The Simple Dollar’s Mortgage Lender Recommendations” on The Simple Dollar blog. It is a very thorough and unbiased review of how to secure a mortgage.

4. Research potential neighborhoods

I am often surprised when clients, who have such a strong desire to own a home, have  just a vague idea of where they want it to be!  I recommend researching potential neighborhoods early, and often: visit open houses, talk to local real estate agents, spend time in the area, study price history on sites like Zillow, and learn about the school districts.

5. Get pre-approved by a lender.

Once you are financially ready, get pre-approved by a lender. Pre-approval is a process in which a lender acknowledges that you can afford to buy a home of a certain price. For pre-approvals, lenders look at your income, savings, and credit score information.

6. And finally, find a real estate agent.

Interview several – maybe you met a potential match while you were researching neighborhoods – a good agent can make the home buying process significantly easier. An added bonus is good chemistry; in our competitive real estate market, it’s likely you will be spending quite a bit of time with your agent! No rush, no pressure – after all, this plan started with a dream…

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Buying Your Own Home? Read This First

It seems nothing can stop Americans from wanting to buy their own homes. It’s almost as if the credit crisis didn’t happen, even though not too long ago we were bombarded daily with stories about crashing prices, underwater mortgages and home foreclosures. It was an American nightmare, not the American Dream.

xbuying_women.jpg.pagespeed.ic.L1kypEE21GBut if you think about the emotional and economic reasons people want to buy instead of rent, it’s not so hard to understand. As a financial advisor, I meet many potential first-time homebuyers who cite these reasons for wanting to buy:

  • “Why should I pay a landlord when I can put the money toward building equity in something myself?”
  • “Paying rent is like throwing money away.”
  • “I don’t trust the stock market. I’d rather put money in real estate.”
  • “Renting feels like a temporary situation. I want to put down roots and nest.”
  • “I want to be able to remodel my home in any way I want, with no restrictions from landlords.”

What I usually do at this point in the conversation is a back-of-the-envelope analysis of what it would look like for my client to buy a home. The key components of the analysis involve money saved and money earned. Continue Reading…


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Buying A New Home? Some Common Misconceptions About Financing It

Due to a combination of low interest rates and improving household balance sheets, the housing market is heating up. For example, in the San  Francisco Bay Area, it isn’t uncommon for final sale prices  to end up to 25% over asking prices. Due to this competitive environment, it pays to understand home financing and not get tripped up by these common misconceptions:

Common misconception #1: All gifts except the annual exclusion are currently taxable.

Not true. If a generous relative is willing to give you a gift of cash to help fund the down payment or closing costs, even if it is over the annual gift tax exclusion of $14,000 (2013 amount) you probably don’t have to worry about anyone paying taxes now or later. Why? Because each of us has a lifetime gift tax exclusion of $5,250,000 (2013 amount) – very few people will come close to maxing out this amount in lifetime gifts. Note: The gift amount over the annual exclusion must be reported to the IRS on Form 709  the year the gift is given for reporting and tracking purposes. In addition, lenders will require a gift letter from the donor.
What to remember: We each have an annual gift tax exclusion and a lifetime gift tax exclusion amount. Besides some reporting requirements, most people will never pay tax on gifts.

Common misconception #2: Lenders will qualify you for a loan based on how much money you have in your bank or brokerage accounts.

Not true. Banks qualify borrowers on income first, not savings.The general rule is that not more than 40% of your pretax income can go to PITI: principal, interest, taxes and insurance plus any monthly debt obligations such as a car loan, student loans  or credit card debt. Lenders will also document that you have enough savings for the down payment, closing costs  and a minimum two to three months of cash reserves covering your PITI plus debt obligations.

Note: There is an exception to this rule and it’s called an asset dissipation loan. However, you must be retired, over age 59 1/2 and not receiving any employment income. Lenders use a formula to calculate how much your assets could produce in income and it would still need to meet the 40% requirement. It’s very difficult to qualify for this type of loan unless you have sufficient assets in the bank to yield enough income to qualify.

Common misconception #3: Believing that  the  “replacement residence rule” still applies. This rule, which expired in 1996 allowed sellers to avoid taxes on their profit as long as they spent that profit on the purchase of a new home within two years of the sale. If you had any of your profit left over after buying the new home, you had to pay taxes on that remainder.

Not true. This rule no longer applies. Since 1997, the rule is called the principal-residence tax break. Now, if you sell your principal residence you can skip tax on a large chunk of the gain-up to $500,000 for married couples filing jointly and up to $250,000 for singles. Profits above those cutoffs are usually taxed as long-term capital gains.

Common misconception #4: It is  difficult for self-employed people to qualify for a mortgage loan just because they are self-employed.

Not true: If you report enough income to qualify for the loan, there is no discrimination to being self-employed. But income must be documented on two years of tax returns and be deemed stable by the lender. “Stable” means that your income stays the same or is increasing year over year. The amount of income must meet the general rule outlined in Misconception #2.

Common misconception #5: Your loan agent/officer can change the rules and make it easier for you to qualify.

Not true: While your loan agent needs  knowledge and expertise to present  your loan properly to a lender the actual underwriting guidelines are written by Fannie Mae and Freddie Mac and apply to everyone.
There are some lenders that will offer portfolio loans and can set the guidelines themselves but this is much less common than it used to be.

Common misconception #6: Your credit score is excellent; your income is stable and adequate; you have money in the bank – so applying for a loan and getting approved will be a piece of cake.

Not true: Since the credit crisis of 2007-2008 lenders have tightened their standards and leave nothing to chance. Stated-income and no-doc or low-doc loans are a thing of the past. Expect to provide a lot of detail about items you think aren’t important. For example, any deposit in your recent bank statements that is not a payroll deposit or other recurring deposit like social security income, must be explained and paper-trailed.

Please note:  This blog post provides general information for home buyers. Consult your tax and financial advisers and/estate planning attorney regarding your specific situation.

Additional Reading:
From the Wall Street Journal: Will Your Home Sale Be Tax-Free?


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Underwater on Your Mortgage? You May Have Another Chance to Refinance for a Lower Payment

On October 24, 2011, President Obama announced changes to HARP (Homeowner Affordable Refinance Program) to allow more underwater homeowners to qualify for the benefit. This new program was dubbed HARP 2.0.

Each mortgage lender was allowed to set its own schedule for implementing the enhancements. For example, lenders needed to re-program their automated underwriting systems to accept the new more generous guidelines set by Fannie Mae and Freddie Mac.

The good news is that some lenders are now ready to go!

The most significant change is that there is no longer a maximum loan-to-value (LTV) cap for homeowners looking to refinance a fixed-rate loan. (The maximum LTV on adjustable rate mortgages is still 105%.) In laymen terms, this means that it no longer matters how underwater a mortgage is. As long as other guidelines are met, a borrower still has a shot at refinancing.

Here are the additional guidelines and enhancements:

  • The loan must be owned by Fannie Mae or Freddie Mac, which means it must be a conforming loan. This amount is generally $417,000 or under but can vary. Check https://www.fanniemae.com/singlefamily/loan-limits for the loan limits in your state.
  • The homeowner must have a source of income.
  • Loans must have been purchased by Fannie or Freddie before June 1, 2009.
  • The current mortgage must be up to date with no late payments in the past 12 months.
  • Payments on the new loan must be more affordable or more stable than on the existing loan.

The appraisal process has been streamlined and an automated value can be used to determine the value of the home.

Do You Qualify?

If you think that you may qualify for this new program, the next best step is to contact your current lender to see if they are offering the new program, or contact a mortgage broker to discuss your specific situation.

Additional Resources

The HARP Mortgage Program

White House Proposes Aid for Underwater Homeowners:

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Walking Away from a Mortgage – Is It a Viable Option?

What Happens if You Walk Away from a Mortgage?During the peak of the real estate buying frenzy (2005–2007) many Americans decided to invest in real estate other than their homes in the hopes of capital gains. Unfortunately, when the bubble burst, the ensuing credit crisis left these investors with a moral dilemma.

Many of these investors are just ordinary folks who pay their bills on time, have good credit scores and would no more consider defaulting on a debt than they would stop brushing their teeth every day! But “walking away” is now on their short list of options to consider.

“Walking away” – also known as voluntary foreclosure or strategic default – occurs when a borrower decides to stop paying a mortgage even though they can still afford the payment. Why would someone consider such a controversial course of action? Because of the following unfortunate circumstances:

  • Market values are way less than the mortgage balance (often referred to as being “underwater”).
  • Refinancing to current lower rates is not an option due to lack of equity.
  • Experiencing negative cash flow (rents are not covering expenses) each month.
  • Selling isn’t an option with prices as depressed as they are, without bringing in cash to close.
  • Difficulty raising rents in current economic environment.
  • No clarity on when real estate market values will recover.

You’ve heard the expression “throwing good money after bad”?

What Happens if You Walk Away?

When you walk away from a mortgage, your credit score will drop. If you have a secure job, own a home with a decent mortgage loan or are happy renting, you may not need a mortgage loan for many years. But if you do plan on buying a home, it will be up to seven years before banks will lend to you, and you may be required to make a bigger down payment or pay higher interest rates.

You will also need to deal with your tenants. Fortunately, their rights are protected by the “Protecting Tenants of Foreclosure Act of 2009.” This legislation requires the new owner to let the tenant stay at least until the end of the lease; month-to-month tenants are entitled to 90 days notice before having to move out.

If you live in California (laws vary by state), as long as you first mortgage is a purchase money loan used to buy a one- to four-unit residential property, you won’t have to worry about  the lender coming after assets other than the property itself. Anti-deficiency statutes exist that protect borrowers in non-recourse states. The same protection doesn’t exist for refinanced loans. In either case, banks in California rarely go down this path due to the time and legal expense involved (at least for now).

If you took out an equity line or HELOC and it was used to buy the property, then it is also considered a non-recourse loan. Otherwise, most equity loans and HELOCs are recourse loans and you will be personally responsible for paying them back after the foreclosure. The lender can pursue you for a deficiency balance.

Under federal law, a lender must report to the IRS any forgiveness of debt in an amount larger than $600. So, as a real estate investor, you will owe tax on the amount of debt forgiven.

There is some “good” news: If you aren’t a professional real estate investor and you have owned the property for several years, it is likely you have accumulated capital loss carryovers. You will be able to deduct those losses from your taxes in the year of the foreclosure.

Two Sides to the Moral Dilemma Debate

Since 2007, the rate of foreclosures has sky-rocketed, and there is no end in sight. A national debate has ensued regarding the decision to walk-away. One side believes that underwater property owners are acting in their financial best interest to walk while the other believes it is shameful and unacceptable.

No matter which side you are on, the decision to stop paying your mortgage is not one to be made lightly. But it’s one that any financially intelligent person would consider with the right circumstances. The most prudent course of action is to get educated, understand all of the repercussions as thoroughly as possible, consult financial professionals as needed, and make a well-thought out decision for yourself and your family.

Do you want to manage your money (and life!) better?

The Happiness SpreadsheetIf you want to think differently about the relationship between your spending, your values and your happiness, then sign up to get your FREE copy of The Happiness Spreadsheet.

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Curtis Financial Planning