How To Prepare NOW To Buy A Home 1 Year (Or More) In Advance

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 in this new market of rising interest rates.

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’ve been browsing Zillow for a few months and you think: Wow, some of these houses are ones that I would love to live in. Then you think: Wait, 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. Interest rates fluctuate, the market changes, but I’m going to give you my advice that will not change no matter what type of market we are in.

The best time to buy a house is simple: when the best time is for you, personally, in your life. The only two mistakes you can make are purchasing a house you can’t really afford out of fear, because you’re scared of missing out, or you’re trying to wait to time some movement in the market that may never happen.

Therefore, my philosophy on when you should buy is this: time IN the market always beats TIMING the market.

The reality is, we don’t know where the market is going to go. If interest rates go up, it is likely that prices will plateau or possibly dip. But, even if prices do go down, your purchasing power went down too with the rise in interest rates, so you’re at a wash.

If you buy at higher interest rates and interest rates go down, well great! You just refinance, and you keep all of the equity that you’ve been building up by purchasing that you would have missed out on by waiting.

And if you buy a house you love with a fixed rate mortgage and payments you can comfortably afford, it doesn’t matter at all what happens with the housing market until you decide to sell.

That means buy as soon as you are comfortable, buy what financially fits you, and start paying into an asset NOW instead of paying rent.

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 recurring debt are properly taken care of and any potential problems are addressed before you move towards a loan preapproval.

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 oftentimes clients have difficulty saving up an entire 20% for a home that they really want, and that is ok as long as you’re making enough money to afford the higher monthly payments that a lower down payment carries. Remember, if you put 10% down, or even 15% down, as soon as you have made enough payments that the equity you have in your home is 20%, you can make that mortgage insurance go away. So don’t worry, it doesn’t last forever!

Now how about that monthly payment? Your monthly housing payment is different than when you were paying rent. Then, it was one check you wrote, one single sum that as long as you paid it each month, you’re good.

Now you have various costs that together are considered your “housing payment”: your mortgage payment, property taxes, insurance and any HOA payments if you purchase a condo or townhome.

Your mortgage payment on a fixed interest loan is the exact same for the life of the loan, 30 years if you get a 30 year fixed loan. That payment has principle, which is money that pays off the loan and you get to keep, and interest, which is the cost to borrow money.

Then you have property taxes, which are due in two lump sums twice a year: December and April. You can choose to prepay these into an escrow account so that you don’t accidentally wind up at these times and not have the money set aside to pay it, or you can just pay online at each of those two times.

Finally, home insurance. Don’t let that scare you, home insurance shouldn’t be more than $100 per month, and much less than that if you’re in a condo or townhome because the HOA will cover a portion of that insurance under an umbrella policy.

The rule of thumb is to keep your housing payment no more than 40% of your gross income. So, simply take what you make a year, divide that by 12, and before you have taxes and other things taken out, you shouldn’t be spending more than 40% of that money on your overall housing payment.

Some folks stretch that to 50% if they know they have a raise or promotion coming down the line, or one partner is returning to the workforce, but that should only be temporary because remember, we don’t want to be house rich and life poor.

A lot of folks think that the right way to approach housing numbers is to find out what purchase price you should look at. I find that it is far easier to look at the amount of money that you don’t wish to exceed on a housing payment per month, and back that number out. Various aspects of the numbers on a loan can be wiggled around, but if you know that number very solidly in your mind, you know that you will end up with a home that you are comfortable with.

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.

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.

here 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.

In fact, everyone that listens to this video can probably benefit from calling their banks on all their credit cards right now, and asking for between a $5,000 to $10,000 increase. They’ll likely give it to you, and your utilization rate, which is how much you spend against how much credit they extend to you will immediately go down.

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. I have access to a free program that gives us everything we need to do to get the credit score up, whether that be the few points that are needed or to really fix low one.

Finally, we have your 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, and it’s a good number to start calculating now because the magic number we’re trying to hit here is 43% or less.

The major recurring types of payments are 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.

For example, I recently had a client that had a car payment she could comfortably afford, but having that recurring payment pushed her debt to income ratio higher than the house purchase price level she wanted. She had the cash to go ahead and pay off the car, and think about this, that $500 towards a car could now directly go towards what she qualified on a housing payment. And an extra $500 per month qualified her for over $100,000 in extra purchase price. Big change.

Again, just a reminder, 43% or less is the number we are trying to hit here.

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 recurring and living 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.

Your goal is to 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. Also, look at canceling or consolidating automatic subscriptions and memberships. I know I’ve been guilty of having a Netflix, Hulu, Disney+, and HBO account, plus a Spotify account on top of that. It might be time to cancel any subscriptions you don’t use regularly.

Finally, try the 30 day rule. Oftentimes if I’m considering buying something, I’ll put it in my cart for 30 days. If I still really feel like I would like it in my life after that time, fantastic! But if not (and most of the time it’s a no), then I avoided an impulse buy successfully.

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 2 years 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. Yes, sometimes the market goes through periods of volatility, but go to most domestic index funds and zoom out, and you’re looking at an upward trend.

Any money not needed for over 1 year should be here in case you have to stomach a downturn of any sort. Remember, don’t buy individual stocks, buy index funds that are well diversified and you’ll be just fine over time and loving the return you’re getting.

And don’t look at these every day! Invest the money and just leave it, no matter what you hear on the daily financial news.

Depending on the amount of 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.

Also, do you get a pretty substantial tax refund each year? That might feel good at that time, but that’s money you’re giving to Uncle Sam that you didn’t actually have to, and it made a 0% return while they kept it.

You might want to take a look at adjusting your deductions so that you’re closer to no refund, or even a very small tax bill so you can get more money each paycheck that can go into investments that actually earn money.

Now is the time to talk to a real estate agent! I 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 pre approval 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.

At Stephens Real Estate we 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.

I also designed a few value adding programs for both buyers and sellers that no one else is offering. For buyers, you get all of your inspections paid for, no questions asked. I even have lenders that specialize in working with folks in the entertainment industry, even if you are freelance.

Sellers, we maximize the price of your most valuable asset by giving you fresh paint, new floors, updated landscaping and full staging at no cost to you.

So, if you like my energy and personality, and think my expertise and the programs I offer would benefit you, it’s never too early to get the conversation started. Additionally, I have a fantastic referral program, so if you know someone that would benefit from connecting with me, I’d absolutely love an introduction.