Real Estate & Credit
The real estate market has seen some roller-coaster rides in recent times. In just the past few weeks, the S&P Essentially Muted Index dropped 11% before bouncing back into positive territory. As a real estate investor, it is important to stay aware of these market changes and ensure your finances are in good order.
This guide will cover how to purchase a first or second home as well as how to acquire financing for that purchase. We'll also dive deep into the intricacies of carrying loans and managing credit scores.
Home Buying
Real estate is typically a major purchase. Before jumping into the market it is important to weigh your options and understand the best ways to finance such an investment. Real estate prices are cyclical and can easily fall below home construction costs. As a result, there are two primary approaches to buying a home:
If purchasing an existing house with cash, you're free to negotiate terms of payment with the seller and can take advantage of significant tax breaks by owning property… More on this later. However, if purchasing a pre-built home, financing is likely your only option. Financing usually comes in the forms of mortgages and home equity lines of credit (or HELOCs).
When you purchase a home, it is common practice to sign a mortgage documents (LOAN DOCUMENTS) which specify the amount of money your lender is willing to loan you and how much they expect to receive in cash when you've fully paid off the loan. Alternatively, a Home Equity Loan is a line of credit used by sellers to help finance the purchase of their property. A HELOC can come in handy when buying more than one home or paying for improvements that will increase the value of your home. When you take out a mortgage, your lender may impose credit checks that can lower the amount they lend or place restrictions on how quickly you can obtain financing based on your credit profile and other factors. As a result, it may be necessary to get a Home Equity Line of Credit in order to have enough money to complete the purchase.
Once you have your loan documents and HELOC, you can move forward with the purchase.
As part of the loan process, lenders may require a substantial down payment (usually 20%) on a new home. If you are buying an existing home with cash, then this down payment requirement is no problem; otherwise it's time to do your due diligence and set aside enough funds for the down payment and closing costs. Closing costs can add up quickly, but the good news is you pay them at the end of the loan process rather than as part of a monthly payment. The final cost of closing is typically around 2% of your home's purchase price plus property taxes, insurance and other related fees.
Once you have paid off your loan documents and own the home free and clear, your property is considered an Asset. The value of this asset will likely change over time based on various factors such as market conditions and housing trends. As a result, it may be advantageous to consider refinancing your mortgage to take advantage of lower rates and better terms that may be available in the future.
In summary, purchasing a home is generally a long and expensive process. Before jumping in, it is important to understand the underlying costs of purchasing a home and the different types of options available. Once you have all of your ducks in a row, you can begin to evaluate any potential tax breaks you might benefit from before finally making your decision.
Note: In this guide we will use the terms "First Home Buyer" and "Second Home Buyer" for people who are buying their first or second homes as an individual without children from 0-16 years old. We will also use the term "Primary Residence" for people who are buying their first or second homes as an individual with children from 0-15 years old.
Without further ado, let's get started!
Purchase a House
If you are purchasing a house as an individual without children, you will typically need to qualify for a mortgage loan. It is important to understand that some mortgages require larger down payments in order to be approved. While this may seem like a simple process, there are many factors that can influence your decision such as: interest rates on outstanding loans, housing market conditions and the current state of the economy.
In order to get a mortgage, you usually need to meet the following requirements:
Be of legal age (usually 18) Income must be stable with no significant changes in employment and family structure. Borrowers cannot declare bankruptcy within the past two years (or less if applicable). Typically, borrowers must maintain an active bank account for at least six months.
If you qualify for a mortgage then it is important to understand the numbers presented on your loan documents. Your lender will typically produce a financial statement based on your gross income that will include various expenses such as taxes, insurance, and utilities. The interest rate and terms of payment can vary significantly depending on the amount of home equity you own or how much debt you have currently.
After signing the loan documents, most mortgage loans require a substantial down payment, which can be as much as 20% of the total home purchase price. Since purchasing a house is a major investment, it is important to consider what this means for your future home purchasing requirements. Since most mortgages require mortgage insurance (MIP), you may need to meet certain requirements in order to qualify for a loan. The MIP amount is typically determined by FICO scores and other factors. Just like any investment, there are risks involved with buying houses such as rising interest rates or the possibility of real estate declines. It is important to understand that some states have instituted laws that restrict the sale of homes with high levels of debt.
After a home buy is complete, it is important to understand how the value of your house will change each year. Over time, climates, property taxes, and other factors can affect the real estate market. The following two calculators will help you plan for this expected growth by providing you with an estimate of your home's value at any given time:
https://www.bankrate.com/calculators/mortgages/the-future-value-of-your-home-calculator/show.aspx?view=rpt&table=calc2#javaScript=";window.location="https://www.bankrate.com/"+window.location;document.
Conclusion
After all of the hard work is complete, you should have a solid understanding of the different types of options available to you and what is expected in return. While purchasing a house can be expensive, it allows you to build equity and potentially save for the future. Likewise, refinancing your existing mortgage can be helpful if it reduces interest rates or gives you access to better terms. With patience and perseverance, homeownership can be a fulfilling experience! If you are looking for more information on purchasing a house as an individual with children, check out this article: https://www.nolo.com/legal-encyclopedia/individuals-with-children-and-mortgages/.
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Real Estate & Credit