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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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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If you found this blog post useful or inspirational, please share it on your favorite social media network!

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