Reduce Debt to Purchase Home

Trying to purchase a home for the first time, then need to get debt under control so can get a mortgage. To qualify for the most or largest mortgage all other debt needs to be gone or almost gone. 

Article Link:
 https://www.nerdwallet.com/article/mortgages/home-buying-checklist-steps-to-buying-house

Transcript

Charles McDonald: 0:01

Hello, I'm your host, Mr. Chuck, a retired accountant turned truck driver, I reduce my debt in a relatively short period of time, debt reduction to achieve financial freedom takes commitment, confidence determination. Read reduce debt to purchase home, trying to purchase a home for the first time, the need to get debt under control. So you can get a mortgage. To qualify for the mortgage, or largest mortgage, all other debt needs to be gone or almost gone. That also will apply to buying a car or any other large purchases where you need to borrow money, the less debt you have, overall, the easier it's going to be to get that new loan. And the easier is going to be on your personal finances. I have a link, I'm going to refer to the nerd wallet, how to buy a house 15 steps and the home buying process. One of the first steps is Are you mentally ready? Are you sure you're ready to buy a home? And have you consider everything within your life? Before you make that big purchase? Buying a home is one's largest financial obligation we have. It's the biggest, most costly item we generally buy in our lives. So are you working in the area? Is your job stable? Are you going to be in that area for next five to 10 years, if you're a first time home bar owner, or if you're wanting to buy up into a different neighborhood, maybe a larger home? Because if you had children? Is this something that you can afford. And one of the way to decide that? Here's what I personally use years ago, when I was thinking about buying my first home. And interest rates were a lot higher than today I got a deal on my interest rate and I got a 12 and a quarter percent mortgage limit me on based on my income and what was available on the house I could buy. Because I couldn't afford much house because of the interest rate. But I knew I was going to be in the area of probably my rest of my career, I'm still in the same area. And it's 40 years later, I decided as as an investment opportunity that if I bought a home and took care of it and remodeled it little by little that it will go up in value. And I'd be able to sell it and make some money. Well get my money back versus paying rent where you just pay out the rent. And then you move away. And you get nothing back. But if you buy a home, and everything goes good, and you make smart decisions and you don't over remodel, you could sell the home for more than what you got into it and you can make your money back. So I call that making my money back. I'm paying I'm basically living rent free. Because when I sell a home, I'm gonna get what I paid back with a little bit of interest if I'm really lucky. That's how I looked at it. So are you ready? Or do you know if you're gonna be in that same state or in that same general area with say a 50 mile radius? That seems City's metro area? Would you worry is your work done a transfer? Yes, sometime in the future? Do you have one of those jobs where you might get transferred every few years? You don't want to buy a home unless you can live there for a minimum of five years or you could lose money on it and we don't want that. So you have to consider everything. Are you married? Do you both work or you can use both incomes to buy the home. What happens if you start having children and one of you decides to stay home and not work? Can you can the other one afford to pay the mortgage and all the expense related to owning a home. Remember there's more and this the mortgage payment. He got the mortgage payment you got utilities. You got some maintenance because things are on a break. You're gonna have to fix things from time to time. You got to mow the yard if you have a yard all that stuff. And if you don't have any lawn mowers or anything, you have to buy it, that all gets kind of expensive. So you got to be sure you're positively ready to make this big step. And then once you decide that, and we're looking two or three years down the road, what is all your other debt? What that can you get rid of? Do you have credit card debt that you can maybe pay off and get off your credit report looking better than what it is? What is your credit score, if you have a low credit score, you're gonna have to improve your credit score before you're gonna be able to get in finances, you have to get your finances in order. And that may take some time. And while you're getting your finances in order, you need to have an emergency fund, and you need to build up savings for a down payment. But when you buy a home, you need more than just the down payment, because you're gonna have closing costs involved. So if you're thinking you're gonna borrow, and these are his numbers, and I'm making it easy on myself, it's not realistic numbers are just rounded numbers is $100,000. Home, if you want to put 20,000 down, so you need 20,000. But your closing costs could be up to five or 10% of that. So that would be another five to 10,000. So in realistic you need 25 to $30,000 just to purchase the home, then what happens if you decide to buy a home that needs some remodeling, the home you buy is not gonna be decorated. And your choice. The colors may not be what you like you may have, if you're lucky, you just paint the walls and move in. Most likely, it's gonna needs a little bit of maintenance. Maybe it has a leaking plumbing sink, maybe you need to do some a little bit of plumbing. Maybe there's some broken you need to fix a cabinet. He needs to clean he needs to paint, you need to make it your own. What's the back out back? Like? What's the patio? How big of a yard you have? Do you have the bylaw more what kind of yard and garden tools you may need. What's the utilities the bigger the home, the more the utility is gonna cost? Yeah, he can't forget about district causes is money that you have to pay every month. So it's good to have enough money upfront. Before you buy the home, to make your downpayment, to pay some closing costs, have some money available to do some decoration may be unique drapes, maybe it does need some painting that that's going to cost your money and take some time, maybe you need to get the carpet clean. Maybe you don't like the carpet and you're gonna pull it out where you're gonna replace it with what's underneath it. Maybe you pull it up, and that's this a sub floor and it doesn't look good. So now you have to put a wood floor down. Now whatever it is you're gonna do, most likely is going to cost you money is going to cost you less money if you do all the work yourself. But however you look at it is going to cost you money. So you need to get your finances in order. You need to get your credit score improved. pay all your bills on time. And now you have to figure out what you can afford. If you're paying rent currently, and you're looking at a home, maybe your rent is$2,000 a month. So you might be thinking I can afford to $1,000 mortgage a month. How are you currently doing now? Are you living paycheck to paycheck? Or do you struggle certain months of the year? Are you able to pay for your insurance? Do you have renter's insurance. Maybe you don't have that expense, but when you buy a home the lenders are required to have homeowners insurance. So that is another expense you have to account for you have to pay real estate taxes. Now the insurance and the real estate taxes is going to come out your payment called an escrow and then the bat lender will pay it for you but you're gonna it's gonna be a monthly payment for you is going to be part of your mortgage payment. If you're moving in into a bigger place, the utilities gonna cost more just because it's that larger area to heat or cool. And one, you're looking at the home, what kind of insulation does it have? Can you find out what the electric bill is what the if it has natural gas or water and sewer? What are the expenses associated with that house? Does that have a homeowner's association fee, you have to find out these things through your realtor. And the more you know, the better you can plan, the better you know if that's a place that you can afford. Now, what we're really striving for here is finding a place where you're not going to struggle from month to month, that you're gonna be able to move in and be comfortable and be able to make all your payments and not be living paycheck to paycheck, a lot of people will or buy a home thinking there might get a pay raise in the next six months or a year or two, then they struggle and then they get behind they use their credit cards, they get a bunch of credit card the though he can see the cycle, and a lot going good for them. So if he can try to buy a home that you can afford, that is very important. If you have student loan debt, how much longer before you get them paid off, the less debt you have, before you get that mortgage, the better off you're gonna be. So he shouldn't have no credit card debt may be only one car loan, and it should be close to being paid off within the next year. If you have two cars and two car loans, you might want to consider selling one of them and getting rid of the loan and buying a good used car and try to pay cash for it. These are just little things that the lender is gonna look at, because they're gonna want to know what your income and, and what your expenses, what you mean, they're not going to look at your total expenses, there's just gonna look at how much debt you have, what's your income to debt ratio, and if it's above 50%, you're not going to have much of a choice to buy a home or Egon have it very difficult to buy to get the mortgage. And you might have to pay higher fees for the interest, which are gonna cost you more money over the long term. So much as this debt, you can get rid off, and you're, you're better off, you're gonna be get your budget under control, track everything, do a budget, increase your savings, get rid of that debt. And then once you get rid of the debt, increase your savings for that downpayment and for the expenses that kind of come when you finally buy that first home, and you have to have a plan, you have to plan all this stuff out at the lower the down payment you have, the more the you're gonna be required to have a mortgage insurance, which then would cost you more money. I believe that if you have 20% or more and down payment, that you're not going to be required to have mortgage insurance unless you have a lot of other debt. And you might be risky. I've talked to a friends of mine and they're talking about their children that make fairly decent income. And they cannot finance a home. I didn't ask him why. But he says he and I make decent money. They're renting now. They've tried to buy homes and they can't get the mortgage. So my guess is they have other debt. I don't know what it is. I didn't ask, but that'd be my choices. They have little or no savings, and they have a lot of or debt. So it's gonna prevent them from getting that mortgage approved. He wants to set aside money for more than just a down payment. Closing costs generally run from two to 5% of the total cost of the loan. And it's also a good idea how some emergency fund in case the knee, the home needs unexpected repairs. And remember, you might want to make changes to it for your personal tastes. To maybe it doesn't have any window coverings and you want to put blinds or something in so you can have some privacy. Maybe they took all the light bulbs out and you had to buy a bunch of light bulbs for LED lights are not cheap. Now, if you're paying seven or $8 a bulb and you gotta buy I have 100 of them, or 50 of them, it can get fairly expensive. So that is the most important part. And then pick a neighborhood where you want to live and find out what the houses are going for. Because this is going to help you plan. And may you may be a couple years away before you can make that purchase. Or even start getting serious because you have credit card debt, you have car loans, you're living paycheck to paycheck, maybe you got some student loans, maybe you're still going to school part time to get a masters or something. So you you're accumulating a little more debt, and you haven't found that career job. So at this point, you don't want to buy a home, you need to get settled in first and get your finances under control, and figure out where you're gonna go in life and where your career can take you and whether or not, you're going to be in some type of career where you get transferred a lot. Sometimes it may be better not to buy a home, depending on the area where you live, it may be cheaper to rent than acquire a home. Well, if you're looking around to different neighborhoods, and trying to figure out where you can afford a home, I mean, your first thing is, where do you want to live, you pick the neighborhoods where that you want to live in and then you do some shopping at this point, maybe you're got half of your down payment, you're working on a you getting your credit cards under control, but you can start looking for the areas and start shopping around a little bit, get a general idea what the going rate selling prices. And if that's in within your budget, you may find that the places where you want to live, you may not be able to afford to live, then you might need to pick another area. Maybe it's an area that realtors are saying it's kind of up and coming. It's kind of rundown now but there's a few homeowners in there fixing their places up cleaning up their lots, you know, they're taking pride in their home. So that may be the area you might want to move to. If it's close to work and convenient for you. And he got you know, groceries and shopping conveniently located. It could be that generally is the older sections of the inner city. If it's not too dangerous, as far as whatever is going on, he can consider it but how are you on doing maintenance work, maybe it needs to have some major carpentry work done, maybe the plumbing needs to be fixed, maybe the electrical needs to be upgraded. Now there are some things you don't want to do yourself. And that would be the electric, the plumbing, you could do yourself to a stent. But then if you're doing major remodeling, he got the factor and how much one is going to take a lot longer, before he can move in because he got to get his work done first. And if you're gone used if you're gonna be the general contractor, he got fine plumbers, electricians, carpenters, you know, painters, whoever, whatever work needs done that you can't or not don't want to do. Maybe you're a medical doctor, and you got a large income, you don't have time to actually do the work or you don't want to injure yourself. So then, okay, I'll I'll be my own general contractor, I can save some money. And then you have to line this stuff up and schedule it and that could be time consuming. It may not take you that much time. But you got to wait till the plumber can come in and do his thing. And maybe a two or three weeks before he can come in, and then you got to wait on the electrician might be another cup. I mean, you can schedule them all at the same time. But then, you know, they be working on different schedules, you got to make sure they can get in the house. And there's lots of little things like that, that you have to consider and take care of. If you do the general contracting yourself, you can save some money. If you do the work yourself. You can save the money. Are you talented? If you are you're mechanically inclined, you can learn how to do some of this stuff by watching YouTube videos especially on just the minor repair and maintenance stuff. doesn't take a whole lot. If you do it yourself you can save some money I'll just put it that way, every homeowner over time, learns how to take care of their house and do things I know when I can do and what I don't want to do, or that I don't want to risk doing because of the cause of fire, or look bad, or whatever the case, once you got your down payments, and you got some extra money, you need to shop around for loans. They're all different types of loans. So it's a conventional loans or mortgages not guaranteed by the federal government. They offer low minimum down payments, but have more stringent qualifications. Then you have FHA loans that are backed by the Federal Housing Administration, they're generally easier to qualify for than conventional loans but have stricter requirements for mortgage insurance, meaning you need a bigger down payment. And it's more paperwork and time consuming. If you're a veteran, you need a VA loan through the Department of Veterans Affairs, then there's jumbo loans, or mortgages for house are more expensive than standard lending lending limits. And they use a required larger downpayment. Renovation loans that let you wrap the cost of the home improvements and the total amount of the home loan, especially when mortgage rates are low. This can be a good way to borrow more money for repairs, well, paying less interest than you would with other types of Home Improvement loans, like a personal loan, a renovation loan, you have to buy the house fairly way under market value. And then you got to go in and completely got the kitchen, the bathrooms, and do major plumbing and major everything. That's what you would use that loan for not just the paint the walls and put new carpet down, that would be for some major work that you're going to pay back over 30 years or 15 years. And that's another thing, the longer the term of the loan, the less your monthly payment. But the more interest you're gonna pay over time, the shorter the years, the bigger the payment, the less interest you're gonna pay. So those are all the things you need to consider. I'll be back in one moment with my final thoughts. If you're interested, and the software that I use personally, to reduce my debt, I have a link in my show notes, shop financial.com, copy and paste it. And we'll take you to the website. If you are looking for any spreadsheets or other information that I talk about from time to time, I have links in my show notes. And I always have links to the articles I refer to and my show notes. Plus other things like the happy draft.org, which is a another organization that helps you with your debt. So feel free to go to my show notes and link and check out whatever I'm putting out there, I appreciate it very much. If you would like to make a contribution to help keep this alive, then I would gladly accept that, say my show notes. Thank you very much. Where should you buy? Should you buy in the city, or should you buy in a more rural rural setting. And that's going to depend on your personal tastes, or your people person and you'd like to socialize a lot on then maybe you need to be in closer to the city where there's more action going on. If you grew up in the rural setting, and that's what you're used to, maybe you want to be out where you have some acreage these are all considerations you have to make when you are buying your home. The more you choose what you like, the more happy you're gonna be. And the longer you stay there. The longer you stay there. The more profit lists they are the higher the sales price your home can be like I bought the my current home and I was only planning to live here 10 years but as house 30 years. So even though at the time I bought the home, it was a struggle, but I got my debt paid off. I paid off all my mortgages and stuff. So now, since I retired a year ago, I'm much better off because I have zero debt. I don't have to pay rent. I just pay my utilities and food and stuff like that. My biggest expense now is taxes and insurance. I hate to say that but that's the case. But what type of lifestyle Are you looking for shipped? be a consideration for the type of home and location where you buy the home. Acreage may be a cheaper option to buy land that's undeveloped at the beginning, but it's hard to get a loan on it. Is it so far out? You have no utilities? Will you be able to get water and sewer and electric? They are, how are you gonna do that? The big thing now seems to be the off grid thing. Going solar is expensive, and it's not 100% reliable. If you kind of want to be in the middle where you don't have to be dependent on solar, wind or whatever, then you need to be where you can get a electric power hooked up. And even if you do a combination of both solar and grid, that may be the way to go. Because now you will have power no matter what, when, in the winter, when you don't have as much sun or when whatever, then you have you you have your own battery bank. And you can charge a solar, so you don't have to use as much grid to keep the cost down. But it's expensive setting up the solar. So one thing, it's another, it's what type of lifestyle that you're looking for is what you need to consider. Now whether this is your first home, or you're upgrading to your dream home, or whatever the case, if you're a first time homeowner, you're not going to be able to afford your dream home, unless you make a lot of money. So if you're gonna be struggling, if you're struggling, now, if you buy a home, you're gonna be struggling then also, it just Navy more. What I did was I bought what I could afford, at the time I bought my first home, I lived there, I upgraded it, I made improvements, I took care of it. And then after, I believe five years, the price of the home skyrocket. So I thought, Well, maybe it's time to sell this home and get a bigger home. And that's what I did. And I've been here for 35 years, roughly, somewhere around there. I got my finances under control. I got my debt paid off, and now I'm sitting relatively good. And my retirement, and that's part of my retirement was going to be the solace home and move somewhere and buy a lesser expensive home. But I got married, so those things change. So it's whatever it is, I wish everybody luck. And you got to stay focused, you have to do your tracking, do your budget, get your emergency fund, build up that down payment, build up more than your down payment, and figure out where you want to live and what you can do what you're comfortable with and doing repairs and our remodeling. And what you're willing to do and what you have time to do. And then you can make your choice of where you want to live and how much you can afford and then go for it. So I wish everybody good luck. The same things apply if you're buying your first automobile, it says a smaller scale, but the same things apply. So good luck, and I wish you all well.