Overcoming the Obstacles To Buying Your First Home

Dear Young & Wanna Buy A Home One Day, Today, I am discussing overcoming obstacles to buying your first home.  Most people buy their first homes in their 30’s. But, there are some benefits to buying a house in your 20s. Some of those benefits include: no longer having to worry about rising rent payments, having a home that could become a rental property later in life (if you are able to move to another house and desire to do so), and being able to comfortably pay the house off prior to the traditional retirement time. However, it is hard enough for anyone of any age to buy a home these days. It is extra difficult to do so if you are under the age of 30. 

My passion for encouraging people aged 30 and under to work toward financial freedom is what made me decide to discuss buying a home in your twenties. Financial freedom has been defined by Robert Kiyosoki as when your passive income (and/or portfolio income) is greater than and can cover your expenses. This first-home purchase plan is what I am suggesting to my daughter, to get her on the road to that goal.  So, let’s get started.

How Your Housing Expense Relates to Your Personal Finances

First, the fact that housing equity makes up about two-thirds of all wealth for the typical (median) household (according to the Economics Policy Institute) indicates how significantly buying a home contributes to the building of your wealth. You cannot participate in that part of wealth-building until you buy a house. 

There are obstacles that could put a dent in your plans to buy a home. But the way to get around and over those obstacles is to know what they might be and plan accordingly. Let’s look at what those obstacles may be. 

Obstacles to buying a home often relate to one of these 5 area: 

• Credit score, 
• Determining how much house you can afford,
• Down payment,
• Income, and
• Type of home you choose.

One of the First Obstacles To Buying Your First House (or Anything Else):

The Credit Score

Unless you have all in cash to pay, one of the first obstacles to buying your first house (or anything else) might be your credit score. 

You need to have a good credit score in order to be able to qualify for a mortgage. In fact, even if you have a credit score that allows you to get a mortgage, your credit rating will determine what your interest rate will be on that loan. 

A higher interest rate can increase the amount that you are paying each month. Over the life of the mortgage, having a lower interest rate can save you thousands of dollars. 

My suggestions for improving your credit score:

• Pay your bills on-time. Put them on auto pay to avoid being late. 
• Get your credit usage down to 30% or less of your available credit limit. In other words, if you have a credit limit of $1000, use no more than $300 in any given month. 
• Work on paying off some of your bills.
• Once a credit card or account is paid off, don’t shut the account down. Doing so will actually lower your credit score. 
• Having a long credit history. So, if you do not have a credit history, start one now. 
• Don’t make any large purchases within 2 years of when you intend on purchasing a home. 
• Check your credit report to make sure that you do not have any inaccuracies. If there are any inaccuracies, have them removed.  

Once your credit score is at least above 760, you will have access to the best mortgage rates. 

The Next Obstacle to Buying Your First House: 

How Much House Can You Afford? 

The next obstacle that you will encounter in the house buying process is determining how much house you can afford. While it can be inspirational to look at houses that you cannot afford, It is a waste of your time and the real estate agent’s time spending a lot of time looking at houses that you cannot afford. 

I use these two rules of thumb in determining this. 

First, I think that people should not take out mortgages that result in monthly payments that are more than 25% of your monthly take home pay. 

You may be thinking, “But Rich Mom, I’ve heard that I could use up to 50% of my monthly pay for monthly mortgage payments.”

Well, that may be true. But, I’ve seen people do that, and to me it didn’t look like fun. People offering you mortgages may tell you that you can afford that. However, just like I say that you have to do your own research to figure out if what you see on the Internet makes sense for you. You have to do your own thinking about whether you want to have a monthly budget that is that tight. 

I suggest to my daughter that before she decides on how much she can spend each month on a mortgage, she takes into account that she needs to save for buying, maintaining, and at some point, replacing a car. She should take into account that she may want to start saving for a possible future child’s education. Also, I know that she wants to max out her Roth IRA. So, she needs to plan around that simultaneous goal. 

Just as important as having enough for the house payments, I should point out that a homeowner needs to have enough money set aside for maintaining the house. Unexpected costs related to things like roofing, plumbing, and electricity can be expensive. 

Furthermore, it is nice to be able to make periodic updates and additions to your home, whether it be through remodeling a room such as a kitchen or bathroom, painting, buying new furniture, landscaping, or something as simple as buying a new grill. (I’ve seen the large Big Green Egg Grills priced well over $1500 in some places.) 

In short, I want home ownership to be a blessing and a joy to my daughter, not a curse. 

Second, I think that the total price of the house should be no more than three times your gross annual income. 

So, let’s look at an example of how this no more than 25% of my take-home pay and not more than 3 times annual take-home income plan looks.

Example:

To figure out your 25% take your monthly income and multiple it by .25 and that tells what 25% of your take home pay is.

Imagine that someone makes $50,000 a year, before taxes. 

If that person lives in Massachusetts, they would have a 5% state tax, in addition to federal taxes. 

So, after state and federal taxes, they would bring home $39,363 per year. 

That’s approximately $3280 per month to bring home, after taxes.

Using the two metrics for how much house you can afford (stated above):

1. Three times the annual salary of $50,000 equals $150,000. That’s the most the house should cost for this example person. 

2. The monthly mortgage payment should be no higher than 25% of their monthly income of $3,280. Take the monthly income of $3,280 and multiply it by .25 = $820

So, the monthly payment should be no more than $820 per month. 

Now a 20% down payment on a $150,000 house is $30,000

That would leave a mortgage of $120,000.

According to the mortgage calculator that I used, the monthly payment on that should be approximately $719 per month, based on a 6% interest rate. 

That $719 per month is well beneath the $820 calculated as the highest suggested monthly payment. 

(In case you want to use it, at the end of this post, I put a link to a mortgage calculator.)

So:

$150,000 house

$30,000 down payment

$120,000 mortgage

$719 monthly mortgage payment. 

Once You Have Determined the Price of the First House That You Will Buy:

 How Much Will You Need For the Down Payment 

Another obstacle to purchasing your first house is having enough for a down payment. The amount that you need to have for a down payment is expressed in terms of a percentage of the total price of the house. 

The percentage that you will need to pay will depend on the type of loan that you get. But, the range for the percentage typically is from 3 to 20% of the price of the house. 

An FHA loan requires you to put down 3.5%. 

However, you may even want to put a larger than required down payment. This will decrease what you pay monthly. 

I recommend to my daughter that she put down 20%, because she would be starting out with more equity in the property and a lower monthly payment. 

But, 20% is not always necessary. People need to shop around for their best options. For instance, consider FHA and VA (if eligible.)

Even if you do not know exactly when you want to buy a house, it is a good idea to start saving toward a down payment now. 

To save for a down payment, I would set up a separate high yield savings account to have money automatically going from my checking account and into the down payment account. ( I would set up a separate account to save for the down payment.)

Buying Your First Home:

About Your Income 

Lenders care a lot about your income. 

They want to know three things about your income:

1. How much money do you earn each month?
2. Is your job stable?
3. Can you prove the above with one to two years of tax returns?

Related to income, lenders also care about your debts. Your debts are what you owe.

Specifically, they are concerned with your debt-to-income ratio. 

This ratio is basically how much monthly income you have left over after you pay your expenses for the month. 

Most lenders like to see a debt-to-income ratio below 45% of your take home pay. 

This means that less than 45% of your take home pay goes toward paying off all other debt including the mortgage. 

For example: 

If you bring home $3,250 a month, a lender would say that you can afford to spend up to 45% of that for all of your debts including your mortgage. 

$3,250 X .45 = $1, 462.50

You could spend up to $1462.50 per month on your combined debt. 

If you have any monthly payments (like student loans and car loans or anything else), you would subtract that from the $1462.50.

For example:

If a person has a $300 student loan payment and a $250 car payment, and no other monthly payments, the amount available for a monthly mortgage payment would be calculated like this:

1450.50 – $300 (student loans) – $250 (car loan) = $912.50

Here, $912.50 is what would be available for the mortgage payment. 

 

Best Type of Home To Get When Buying Your First Home

With all of the above in mind, my suggestion to my daughter is that the best type of home or house to buy first is a multifamily house, which is a house with more than one unit. Here, I am discussing a house with 2 to no more than 4 units. 

The benefits of buying this type of house are threefold. 

First, by staying under 5 units, you will be applying for a residential mortgage rather than a commercial mortgage, which is needed if your property has 5 or more units. The commercial mortgage would come at a higher expense. 

Second, often lenders will let you use part of the income from the multifamily to qualify for the mortgage. 

Third, (and this is my favorite) buying a multifamily home is buying a rental property. This is the first step in accumulating a new type of income producing asset, which ultimately, means a new stream of income for you.  

Key Takeaways…

1. There are several obstacles that may hinder your ability to buy a home. 
2. The key to getting over home buying obstacles is to know what they are, plan accordingly, and take action. 
3. Work to get your credit score as high as possible.
4. Figure out how much house you can afford. No more than 3 times your annual take home pay is a good.
5. Figure out how much you need for a down payment.  Look around at the variety of loans that are available. Some require less of a down payment than others. 
6. No matter whether you think that you may find a mortgage that requires low or no down payment, you may want to make a down payment anyway, as it should get you a better loan rate. 
7. Keep your debt-to-income ratio at 45% or lower.
8. Consider buying a multifamily as your first home, since the income from the units that you rent out can often be partially used toward your income to purchase it. 
9. Another benefit to buying a multifamily is that it can provide you with an  additional stream of income. 

                                           

My Final Words…

It is getting harder and harder to be able to buy a home. If people can get into the housing market safely, perhaps they should do so. The key word is safely. I am not suggesting that people take on more than they can handle. Otherwise, the obstacles will stop the unprepared in their tracks. But, with proper planning and preparation, one can prepare themselves to leap over the obstacles. 

That’s all for now.. 

Love & Wishing You the Best in Moving Toward Purchasing Your First Home, 

Rich Mom

P.S. It is my hope that you will be able to join what I call the “WOOL” movement. That “WOOL” stands for Work Optional, Optimal Life. 

By focusing on accumulating assets (like a rental property) that pay you money, rather than things that take money out of your pocket, you will be moving in that direction. 

Mortgage Calculator

Here is a link to the mortgage calculator that I used: https://www.mortgagecalculatorplus.com/mortgage/united-states/

To read the Economic Policy Institute article that I saw mentioning the statistic about home equity and family wealth, you can go here: https://www.epi.org/blog/the-racial-wealth-gap-how-african-americans-have-been-shortchanged-out-of-the-materials-to-build-wealth/

Looking for more financial resources? Check out the Rich Mom Poor Kid Resources page.

Who is Rich Mom? 

If you’re wondering who Rich Mom is, check out my “About Rich Mom” page. 

Also, please note: I am not an investment advisor. Always do your own due diligence and research before investing. Check with your own investment advisor. 

The information shared here is not intended as financial advice, just encouragement and entertainment.  

Earn Higher Interest:

A good way to start on passive income is to start to keep your savings, including the money that you are saving for your house down payment, in a high yield savings account. 

At the time that I am writing this, my favorite place for high yield savings accounts is Marcus by Goldman Sachs.

Goldman Sachs is an investment bank that has been around for about 154 years, and their online Marcus Bank offers some of the highest yields that I have seen. 

In addition to their high interest rate, if you would like to use my link, they are offering 3 months of an additional 1% on top of their already high interest rate, while the offer lasts. So, as I am writing this, their 4.50% would be bumped up to 5.50% for 3 months.  

(Here’s my link: Marcus by Goldman Sachs )

Be sure to check out the offer online to make sure that you are comfortable with it, and feel comfortable that this is not a scam. It’s not. But, there are lots of scams out there, and I encourage you to always verify any offers before you sign up

Some other posts that you may be interested in reading:

Becoming a Millionaire by Starting in My Twenties

A Secret to Success (One Secret That Is Not Taught In School)