How to PREPARE to Buy a Home 1 Year or More Out
Got the goal of buying a house but have no idea where to start? If you think you’re 1 year or more away from purchasing your first home, here is exactly what I recommend to prepare.
Hello everyone, my name is Cameron Stephens, the entertainment industry’s real estate agent and the owner of Stephens Real Estate, a real estate experience tailored to the creative client.
Ok so you had a few glasses of wine, wound up on Zillow browsing homes, and now you’re thinking: that would be super cool, I think I’d like to buy a home, they all look so pretty, let’s do it! But then you wake up, wine no longer swirling in your system, and you think: I don't have the faintest idea how to make that happen.
Guess what? That’s most people, so first thing is: don’t worry!! This process may seem daunting and complicated, but I’m going to demystify it for you, to tell you exactly how to prepare and then when we do get to the complicated stuff, I’ll be there to help and advise, until you get those keys in your hand.
But before we get to the first step, let’s talk a little bit about timing. With interest rates so low, the cost to borrow money is historically cheap, and some people are feeling a lot of FOMO, like they have to buy now or they will miss out. Others are thinking that prices are rising fast and they should wait until prices drop. Both of these lines of thinking are incorrect.
The best time to buy a house is simple: when the best time is for you, personally, in your life. But if your reaction to that is, yeah yeah yeah I get that, but come on Cameron, just give me a little guidance on when I should buy, this is the best advice I can give you: time IN the market always beats TIMING the market.
That means buy as soon as you are comfortable, buy what financially fits you, and start paying into an asset NOW instead of paying into rent. The longer you own, the more equity you build, and buying something that you love and is financially comfortable will allow you to weather any ups and downs in the market while paying yourself each month with money YOU get to keep.
Ok, so with that out of the way, you know buying a home is a smart financial decision, but you’re at least a year out from buying, what do you do to prepare? The first thing is to get your finances in order. Making sure all aspects of your finances including your down payment money, credit, and any debt are properly taken care of and any potential problems are addressed before you move towards a loan preapproval.
First step: the down payment. I advise my clients to have at least 10% down payment to purchase a home in Los Angeles. You will incur mortgage insurance on any down payment less than 20%, but interest rates are still great at these levels.
So let’s talk numbers then. The minimum price to get a condo in Los Angeles is about 500,000 and for a single family home, about 700,000. The maximum purchase price on a conforming loan in Los Angeles is just over 1 million, so let’s keep it round and say a million even. Many of the nicer areas of Los Angeles with great schools have median price points at around 1.5 million, so let’s run that as well. I’ll do all of these with 10% down payments except the last one.
At $500,000, that is 50,000 down and a monthly payment of about $2,400 per month
At $700,000, that is 70,000 down and a monthly payment of about $3,400 per month
At $1,000,000, that is 100,000 down and a monthly payment of about $4,900 per month
At $1,500,000, they are going to make you put 20% down so that's $300,000 down and a monthly payment of about $7,500 per month.
Just to be clear, the down payment is what you should have in cash or investments like stock and bonds that you intend to sell to purchase a home. The monthly payment is your mortgage payment, principle and interest, plus taxes and insurance. If you have any questions about this, I have another video breaking down the mortgage payment, or you can just book a consultation with me and I’d be happy to explain this in greater detail.
Now, you shouldn’t be spending more than 40% of your gross income on housing so here is how much your total family income needs to be to afford a home at each of these levels.
At $500,000 your total household income should be $72,000 per year.
At $700,000 your total household income should be $102,000 per year.
At $1,000,000 your total household income should be $147,000 per year.
At $1,500,000 your total household income should be $225,000 per year.
Remember that can be across two purchasers, so a couple purchasing a $500,000 home only needs to make $36,000 per year each. And at $700,000 each person only needs to be making $51,000 each. But yes, it does also show that to have a million dollar home and above, at least one person purchasing will need to have a six figure income to comfortably afford the home.
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Ok we’ve looked at down payment numbers and monthly payment. Next let’s look at credit scores. If you don’t know your credit score right now, hit pause immediately and check your credit score. Almost all major banks offer it as a free service and there are many online that are free as well. Just type in “free credit report” and hit search.
No seriously do it now, I’ll wait.
Ok chances are you got what is called your FICO score, which is just one score of the three credit bureaus but don't worry, it’ll be good enough to work off of. The first major break in loan prices is for a score of at least 720. That’s where the big savings come, so that should be your goal if you aren’t there quite yet. There is another break at 740, not as big as the break at 720, but still a good one. And anything about 740 is basically the same, it means you’ve got excellent credit and lenders are happy to lend to you.
If you’re not at 720, that’s something to fix as soon as possible. Usually you can pay off some debt like credit card to boost it. Or, if you don’t have enough credit history built up, you can become an authorized user on a family member’s credit card to build history faster. If you’re far enough in advance, you can call your credit card companies and ask for an increase in your credit limit or even open a new credit card and just put a couple charges on it a month and pay it off in full.
If these aren’t enough or are not good options for you, schedule a consultation with me, I’ve worked with plenty of people to get their credit scores up, but it can take as long as 6 months which is why it’s a great idea to start working on that immediately.
Finally, we have debt, and specifically debt to income ratio, as that’s another big thing lenders look for. Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income. This number is one way lenders measure your ability to manage the monthly payments to repay the money you plan to borrow, so you can start now calculating that because the magic number we’re trying to hit here is 43% or less.
Ok let’s take the $500,000 home example. If you make $75,000 a year total that means you gross $6,250 per month. 43% of that is $2685. The mortgage payment on the $500,000 home is $2,000 per month (not total housing payment, just mortgage payment). So as long as your recurring debt isn’t more than another $685 dollars per month you should be fine. You can always still get a loan if your debt to income ratio is higher than 43%, it’s just that the best pricing is at that point, so I suggest you shoot for that.
On top of the mortgage payment, car payments, child support, student loans, and minimum credit card payments on unpaid balances count towards that. That’s why taking a look early at some of these things and possibly paying down things like a credit card or some remaining student loans can have a massive impact on your financing ability.
So if you’ve been following closely, you’ll see a few trends: save diligently, know your credit score, and pay down debt. Here are a few miscellaneous tips to help achieve all of these things.
Instead of “saving”, pay yourself from your earnings and put the rest into savings. Think of yourself as an employee of your own corporation. At Cameron Stephens incorporated, I make a certain amount of money total, with which I invest a portion, pay expenses, and only then I do pay Cameron Stephens the individual. This mindset can completely change the way you think about saving.
Knowledge is power so use a budgeting tool. Start by taking your credit card statements from the past year, all 12 months of them, and seeing what your monthly expenses are. Understand what that average is and how much you’re truly spending per month and per year. If you need more help than that, a program like Mint is free and great to see what your expenses are by categorizing them.
Then, if you’re serious about buying a home, consider cutting back on some things for a little while, like eating out, or vacations. It will be worth it in the long run for your financial future!
Save like a pro. Remember, most big banks are the absolute worst place to keep money in a savings account, after physical cash that is. Instead, use a high yield savings account like Ally Bank that I use or Marcus by Goldman Sachs. The numbers might not look high but they are actually paying somewhere between 10 and 100 times more on interest for your money than say Bank of America or Wells Fargo.
If you’re more than 1 year out, I highly recommend getting a far better return on the money you’re saving by being invested in index funds. I use Vanguard, and they have some incredible low cost index funds that mimic the S&P 500 like VFIAX. Charles Scwab also has a great low cost index fund that mimics the S&P 500 as well.
Any money not needed for at least 1 year should be here in case you have to stomach a downturn of any sort. Remember, don’t buy stocks, buy index funds that are well diversified and you’ll be just fine and loving the return you’re getting.
Depending on your savings, this could be 10s of thousands of dollars you are able to add to your down payment. Then, when you actually get closer to buying, you can convert a portion of the investments to your high yield savings account so they are nice and protected and liquid as well.
Now is the time to talk to a real estate agent! Yes, I LOVE LOVE LOVE financial fitness and I love helping people prepare to take the step towards buying a home, but I realize that this advice could be kind of general. I will often put together personalized financial plans and tips for clients, and though I’m not a financial adviser, I have straightforward and practical advice to draw on and share.
The last step is to talk to a lender! This just builds off of the relationship you develop with a real estate agent, because the lender can take a look at your financial documents like your tax returns and pay stubs and help give you more financial advice on how to maximize your credit score or improve your debt to income ratio. The lender is that last step as they are the ones issuing your preapproval which is a signed commitment to lend you the money to purchase your first home.
Ok there you have it! Thank you for watching, I hope you learned a whole lot about preparing to buy your first home, especially if you are a year or more out from doing so. The best parting advice I can give is start preparing now including starting that relationship with an agent, like myself, early.
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These days, I almost exclusively work with referrals because you all are people I know, trust, and who appreciate the services I offer, so thank you so much for referring me!
And of course, if you just found this video and you like my energy and personality and think my expertise would benefit you, I’d love to work with you as well!
At Stephens Real Estate I specialize in working with creative professionals, entrepreneurs, and especially people in the entertainment industry because I spent 7 years of my life working in animation and visual effects. That is why I designed Stephens Real Estate to be tailored to the creative client.
Plus, we offer a few value adding programs for both buyers and sellers that no one else is offering. For buyers, we put together a full marketing plan that paints you as the right buyer for your dream home. We can help recommend local lenders that will fit your financing situation, even if you’re freelance. And don’t worry about the inspections, we’ve got you covered. They’re free, all of them, no questions asked.
And If you’re looking to sell your home, we offer the ability to REMODEL NOW, and PAY WHEN YOU SELL with Zero fees, no interest, no upfront costs. Plus, we pay for all of the aspects of digital marketing from photography, drone footage, videography, 3D walkthrough and virtual open houses, social media campaign, custom website, targeted emails and more.