Making Real Estate Decisions Based on Your Personal Financial Situation

When it comes to finances, I say “everyone's financials are put together differently and unravel differently”. When it comes to buying or selling real estate, understanding your personal financial situation is crucial. Want to be a savvy buyer or seller? Knowing exactly how much you have going out, how much you have coming in, and what you are spending it on will catapult you to the top of the real estate class! Every dollar has a name and a purpose. – Dave Ramsey Having this type of knowledge positions you to be able to make smart moves and take advantage of market opportunities that serve YOUR best interests when they present themselves. Here’s how you can apply these principles to make the best decisions for yourself. Evaluate Your Budget, Savings, and Credit Score BUDGET Calculate Monthly Income and Expenses: Start by listing all sources of income and tracking your monthly expenses. Set aside one hour and make it happen. Pull out the last three to six months of your bank statements and get to work. Identify all of your expenses month-over-month categorically. For example, Rent, Food: Eating Out, Food; Groceries, Utilities, Auto, Student Loans, Childcare, barber shop, nail salon, etc. Get specific. List them on a sheet of paper with two columns – one column for “needs” and the other column will read “wants”. The items that fall under the needs column are necessities. The items that fall under the wants column you can survive without – for now. For the sake of homeownership, you would be willing to make the sacrifice. This exercise helps you understand your cash flow and how much you can realistically allocate towards housing costs. Set a Housing Budget: Now that you know what you have coming in and going out, let’s determine a maximum amount you’re willing to spend on a home purchase. This includes mortgage payments, property taxes, insurance, maintenance, and utilities. Aim to keep housing expenses within 30% of your gross monthly income. What number did you come up with? Creating a Realistic Budget (AN EXAMPLE) Let's walk out the steps above using a monthly income of $7,000 and current housing/rent costs of $2,300 per month. We'll break down expenses into needs and wants to get a comprehensive view of our example cash flow. Step 1: Calculate Monthly Income and Expenses Determine what you have going out and coming in, and what's a need and what;s a want. In the example below, we’ve listed all our sources of income and listed our monthly expenses by pulling out our bank statements from the last three to six months and categorized our expenses into needs and wants. Example: Monthly Income: $7,000 Monthly Expenses (Needs): Housing/Rent: $2,300
Groceries: $600
Utilities: $400
Transportation: $600
Health Insurance: $300
Student Loans: $250
Childcare: $700
Savings: $500
Phone Bill: $100
Insurance: $200

Total Needs: $5,950 Monthly Expenses (Wants): Eating Out: $200
Entertainment: $150
Gym Membership: $50
Shopping: $100
Personal Care: $100
Vacation Savings: $250
Total Wants: $850 Total Expenses: $6,800 Step 2: Set a Housing Budget Now that we know what we have coming in and going out, let’s determine a maximum amount we’re willing to spend on a home purchase. This includes mortgage payments, property taxes, insurance, maintenance, and utilities. Let's aim to keep housing expenses within 30% of our gross monthly income. Example Calculation: Gross Monthly Income: $7,000 30% of Gross Monthly Income: $7,000 x 0.30 = $2,100 This means we should aim to keep our total housing costs (mortgage, property taxes, insurance, maintenance, and utilities) within $2,100 per month. However, since our current rent is $2,300, we may need to adjust other expenses or find additional income to maintain a balanced budget.This is real life folks... sometimes adjustments need to be made and exact percentages can't always be followed. Step 3: Apply the Results Using the example above, if your gross monthly income is $7,000 and your current rent is $2,300 per month, you have $4,700 left for other needs and wants. By carefully tracking and categorizing your expenses, you can see where you might cut back or adjust to ensure you stay within your means. By following these steps, you can make informed decisions about how much you can afford to spend on housing, ensuring that your real estate choices fit within your financial reality. This practical approach helps you balance your needs and wants while striving for homeownership. When you have a monthly expense that fluctuates, the best way to account for it in your budget is to average the cost over several months. Here's how you can do it: 1. Track the Expense Over Time: Look at the last 3 to 6 months of your spending on this fluctuating expense. For example, if your utility bills vary each month, gather the bills for the past six months. 2. Calculate the Average: Add up the total cost of the expense over these months and divide by the number of months to get an average. For example, if your utility bills were $100, $120, $90, $110, $130, and $95 over six months, you would add these amounts to get $645. Divide $645 by 6 to get an average monthly cost of $107.50. 3. Budget the Average Amount: Use this average amount in your monthly budget to give you a more accurate estimate of your expenses. In this case, you would budget $108 for utilities each month. 4. Create a Buffer: If the expense can vary significantly, it’s also a good idea to build a small buffer into your budget to cover any months where the cost is higher than average. For example, you might budget $120 instead of $108 for utilities to ensure you’re covered. By using the average cost and adding a buffer, you can manage fluctuating expenses more effectively and ensure your budget remains accurate and reliable. Creating a budget and tracking expenses can be streamlined with the help of various budget apps and websites. For a comprehensive budgeting tool, consider using Mint, which links to your bank accounts, categorizes transactions, track your spending, create budgets, monitor your financial goals, and provides insights into your spending habits. YNAB (You Need A Budget) is another excellent option that encourages proactive financial management and educational resources. For those looking for a simple yet effective approach, the EveryDollar app, created by financial expert Dave Ramsey, offers a straightforward way to track your income and expenses helping you assign every dollar a purpose. Websites like NerdWallet and Investopedia provide valuable resources and tips on budgeting and financial planning. PocketGuard simplifies budgeting by showing you how much disposable income you have after covering essentials.  For a more hands-on approach, Goodbudget uses the envelope system to manage your budget.  These tools and platforms can make managing your finances easier and more efficient, helping you stay on track with your budget and financial goals. Mint: www.mint.com
YNAB (You Need A Budget): www.ynab.com
EveryDollar: www.everydollar.com
NerdWallet: www.nerdwallet.com
Investopedia: www.investopedia.com
PocketGuard www.pocketguard.com
Goodbudget www.goodbudget.com SAVINGS How to Assess Your Savings for a Down Payment A crucial step in preparing to buy a home is assessing your savings to determine how much you can afford for a down payment. A larger down payment not only reduces your monthly mortgage payments but can also help you avoid private mortgage insurance (PMI). Here’s a step-by-step guide to help you through this process, including considering down payment assistance (DPA) programs and gift funds as options. Step 1: Determine Your Savings Goals Understand the Importance of a Down Payment: A down payment is a percentage of the home's purchase price that you pay upfront. The more you can put down, the less you’ll need to borrow, which lowers your monthly payments and the total interest paid over the life of the loan. Set a Target Amount: 20% Down: Aim to save at least 20% of the home’s purchase price. This helps you avoid PMI, which lenders typically require if your down payment is less than 20%. 3.5% Down (FHA Loan): Alternatively, you can aim for a smaller down payment, such as 3.5%, which is typical for FHA loans. This option makes homeownership more affordable and within reach for many buyers, though you may need to pay PMI. What is PMI? Private Mortgage Insurance (PMI) is an additional cost that lenders require from buyers who put down less than 20% of the home's purchase price. PMI protects the lender in case you default on your loan. It is added to your monthly mortgage payment until you reach 20% equity in your home. PMI can be removed through refinancing your mortgage, having it fall off automatically when you reach 22% equity, or avoiding it altogether by making a 20% down payment at the time of purchase. NOTEWORTHY  | According to an article by Real Estate Witch, in 2023, a significant percentage of homebuyers in the U.S. put down less than 20% when purchasing a home. The article reports nearly two-thirds (62%) of millennials planned to put down less than 20% on their home purchase. This trend reflects broader financial challenges and priorities, with many buyers opting for lower down payments to make homeownership more accessible despite higher costs​ (https://www.realestatewitch.com/2023-millennial-home-buyer-report/) For many millennials and other buyers, high interest rates and rising home prices have made saving for a large down payment more difficult. As a result, many are turning to options like FHA loans, which require as little as 3.5% down, or utilizing down payment assistance programs and gift funds from family and friends to cover their initial costs​ (https://www.realestatewitch.com/2024-millennial-home-buyer-report/) Step 2: Evaluate Your Current Savings Review Your Savings Accounts: Check the balance of your savings accounts, including any funds in high-yield savings accounts, money market accounts, or certificates of deposit (CDs). Consider Other Assets: Include any liquid assets that can be easily converted to cash, such as stocks or bonds. However, be mindful of the tax implications and potential market risks when liquidating investments. Step 3: Consider Down Payment Assistance (DPA) Programs and Gift Funds Research DPA Options: Look into down payment assistance programs offered by local, state, and federal agencies. These programs can provide grants, loans, or other financial assistance to help cover your down payment and closing costs. Federal Programs: The Federal Housing Administration (FHA) offers loans with down payments as low as 3.5%, making homeownership more affordable and within reach for many buyers. State and Local Programs: Many states and local governments offer DPA programs tailored to their residents. These programs may include grants that do not need to be repaid, deferred loans that are repaid when you sell the home, or low-interest loans that add to your mortgage balance. Eligibility Requirements: Check the eligibility requirements for DPA programs, which may include income limits, purchase price limits, and first-time homebuyer status. Some programs are specifically designed to help low-to-moderate-income buyers or those purchasing in designated areas. Examples of Down Payments: 20% Down Payment: If you’re looking to buy a home priced at $400,000, a 20% down payment would be $80,000.
3.5% Down Payment (FHA Loan): For the same $400,000 home, an FHA loan requires a down payment of 3.5%, which is $14,000.
Using DPA and Gift Funds: If you qualify for a DPA program that offers a grant of $7,000 and receive $3,000 in gift funds, your savings requirement would be reduced to $4,000 for the FHA loan down payment. Consider Gift Funds: Gift funds from family members or close friends can also be used towards your down payment. Most lenders allow gift funds, but you will need to provide a gift letter stating that the money is a gift and does not need to be repaid. Ensure you check with your lender for specific requirements regarding gift funds. Step 4: Calculate How Much You Need to Save Estimate the Home Price: Research the price range of homes you are interested in. For example, if you’re looking at homes around $400,000, calculate the down payment based on 20% or the 3.5% DPA option. Subtract Current Savings: Subtract your current savings from your target down payment amount to determine how much more you need to save. For instance, if you already have $20,000 saved, you’ll need an additional $60,000 for a 20% down payment or an additional $4,000 for an FHA loan down payment (factoring in DPA and gift funds). Step 5: Develop a Savings Plan Set Monthly Savings Goals: Break down your total savings goal into manageable monthly amounts. If you need to save an additional $60,000 for a 20% down payment in three years, you’ll need to save $1,667 per month. If you need to save an additional $4,000 for an FHA down payment in one year, you’ll need to save about $334 per month. Automate Savings: Set up automatic transfers from your checking account to your savings account to ensure you consistently save each month. Cut Unnecessary Expenses: Review your budget and identify areas where you can reduce spending. Redirect these savings towards your down payment fund. Step 6: Track Your Progress Monitor Savings Growth: Regularly check your savings account to track your progress. Use budgeting apps or spreadsheets to help you stay on target. Adjust as Needed: If you experience changes in income or expenses, adjust your savings plan accordingly. Stay flexible and keep your goal in sight. Step 7: Prepare for Additional Costs Account for Closing Costs: In addition to your down payment, save for closing costs, which typically range from 2% to 5% of the home’s purchase price. For a $400,000 home, this could be an additional $8,000 to $20,000. Build an Emergency Fund: Ensure you have an emergency fund to cover unexpected expenses that may arise during the home buying process or after moving in. By following these steps and considering all of your options such as down payment assistance programs and gift funds, you can create a solid plan to afford a down payment and buy your home. This approach places you in a strong financial position when it’s time to purchase, helping ensure more options are made available to you, better mortgage terms are afforded you and your dream of home ownership becomes a reality. CREDIT SCORE How to Improve Your Credit Score Before Buying a Home Your credit score plays a crucial role in qualifying for a mortgage and securing the best interest rates. Here’s a step-by-step guide to help you check and improve your credit score before purchasing a home: Step 1: Check Your Credit Report Obtain Your Credit Report: Start by getting a free copy of your credit report from the three major credit bureaus: Experian, Equifax, and TransUnion. You can request these reports for free once a year from www.annualcreditreport.com. Review for Errors: Carefully review each report for any inaccuracies or errors. Common errors include incorrect personal information, accounts that don’t belong to you, incorrect account status, and outdated information. Dispute Errors: If you find any errors, dispute them with the credit bureau that issued the report. Each bureau has an online dispute process where you can report inaccuracies and provide documentation to support your claim. Correcting these errors can improve your credit score. Step 2: Improve Your Credit Score Pay Down Debt:    - Reduce Credit Card Balances: Aim to pay down credit card balances to lower your credit utilization ratio (the amount of credit you’re using compared to your credit limit). Ideally, keep your utilization below 30%.    - Prioritize High-Interest Debt: Focus on paying off high-interest debt first to reduce the overall amount you owe and improve your debt-to-income ratio. Make Timely Payments:    - Set Up Payment Reminders: Ensure all your bills, including credit cards, loans, and utilities, are paid on time. Set up automatic payments or reminders to avoid late payments, which can significantly impact your credit score.    - Pay More Than the Minimum: If possible, pay more than the minimum payment on your credit cards to reduce the balance faster and avoid interest charges. Avoid Opening New Credit Accounts:    - Limit Hard Inquiries: Avoid applying for new credit cards or loans in the months leading up to your home purchase. Each hard inquiry can temporarily lower your credit score.    - Maintain Existing Accounts: Keep your existing credit accounts open and active, even if you don’t use them frequently. Closing accounts can reduce your overall credit limit and increase your credit utilization ratio. Diversify Your Credit Mix:    - Manage Different Types of Credit: Having a mix of credit types, such as credit cards, installment loans, and mortgages, can positively impact your credit score. However, only take on new credit if it makes sense for your financial situation. Monitor Your Progress:    - Track Changes: Regularly check your credit score to monitor your progress. Use free credit monitoring tools or services provided by your bank or credit card issuer.    - Adjust Strategies as Needed: If your score isn’t improving as quickly as you’d like, reassess your strategy. Consider speaking with a financial advisor or credit counselor for personalized advice. Step 3: Prepare for Your Home Purchase 1. Check Your Score Before Applying: Verify Your Score with a Lender: Before starting the mortgage application process, it's important to meet with a lender to get an accurate assessment of your credit score. Commercial websites might show a different score than what mortgage lenders use, as lenders rely on specific credit scoring models tailored for mortgage lending. Meeting with a lender helps ensure you know your true mortgage credit score and understand any steps you need to take to qualify for the best rates. Most lenders prefer a score of at least 620 for conventional loans, but higher scores can secure better rates. 2. Consult with a Mortgage Advisor:    - Take a Financial Snapshot: You could call this the pre-approval process. However, most lender will not continue working with you if you don’t meet their criteria. They will send you on your way and tell you to “come back when you are ready”. But then you have the other 20% who go above and beyond and will help you map out your plan towards homeownership. This makes the pre-approval process, in my mind’s eye, a financial snapshot – them looking at where you are financially and then creating scenarios and solutions which help you determine what steps you needs to take to get you to the vision of where you want to be. Speak with an experienced mortgage advisor to get pre-approved for a loan. They can provide insights into how your credit score affects your loan options and suggest further improvements as necessary. My Recommended Resources and Vendors 1. Blue Water Credit: Blue Water Credit offers comprehensive credit repair services to help you improve your credit score. They provide personalized strategies and support to address inaccuracies and enhance your credit profile. Visit their website at www.bluewatercredit.com for more information. 2. MyCreditGuy: MyCreditGuy specializes in credit restoration and education, helping clients understand and improve their credit scores. They offer tailored solutions to meet your specific needs. Learn more about their services at www.mycreditguy.com. By following these steps and utilizing resources like Blue Water Credit and MyCreditGuy, you can enhance your credit score, qualify for better mortgage rates, and secure favorable loan terms. This preparation will help you be in a strong financial position when it’s time to purchase your home, ultimately saving you money over the life of your mortgage. Understanding Resources to Improve Your Credit Report Improving your credit report is a vital step towards financial stability and accessing better loan terms. Here are some essential resources and how they can help you: 1. AnnualCreditReport.com AnnualCreditReport.com What It Offers: Free Credit Reports: This is the only authorized source to get free credit reports from the three major credit bureaus (Experian, Equifax, and TransUnion) once a year. Comprehensive Overview: You can review detailed reports to identify errors, track your credit history, and understand factors affecting your credit score. No Hidden Costs: The service is entirely free without any hidden charges or subscription requirements. How to Use It: Request Reports Annually: Visit the website and follow the prompts to request your free credit reports from each bureau. Review them for accuracy and dispute any errors directly with the bureaus. 2. MyFICO MyFICO What It Offers: FICO Scores: Provides access to your FICO scores, which are used by 90% of top lenders to make credit decisions. Credit Monitoring: Offers tools to monitor changes to your credit report and get alerts for significant changes. Educational Resources: Provides detailed explanations of the factors influencing your FICO score and tips for improvement. How to Use It: Monitor Regularly: Subscribe to their monitoring services to get real-time updates and detailed insights into your credit score. Learn and Improve: Utilize the educational resources to understand what impacts your credit score and follow their tips to improve it. 3. Credit Karma Credit Karma What It Offers: Free Credit Scores: Access free credit scores from TransUnion and Equifax, updated weekly. Credit Monitoring: Receive alerts for significant changes to your credit reports. Financial Tools: Offers personalized recommendations for credit cards, loans, and other financial products based on your credit profile. How to Use It: Regular Check-Ins: Use Credit Karma to monitor your credit scores and reports regularly for free. Take Action on Recommendations: Follow personalized advice and recommendations to improve your credit score and find suitable financial products. 4. Experian Experian What It Offers: Credit Reports and Scores: Provides access to your Experian credit report and FICO score. Boost Your Credit Score: Experian Boost is a free service that allows you to add positive payment history from utility and phone bills to your credit report, potentially increasing your credit score. Credit Monitoring and Alerts: Offers comprehensive credit monitoring and alerts for any changes or suspicious activity. How to Use It: Boost Your Score: Sign up for Experian Boost to add positive payment history to your credit report. Monitor and Protect: Subscribe to their monitoring services to stay informed about changes to your credit report and protect against identity theft. Step 4. Clearly Understand Other Related Costs:  How to Clearly Understand Other Related Costs When Buying a Home in Sacramento County, California When budgeting for a home purchase in Sacramento County, it's essential to factor in costs beyond the mortgage payment. Here’s a detailed guide to help you understand and plan for these additional expenses: 1. Closing Costs | What Are Closing Costs? - Closing costs are fees and expenses paid when finalizing your home purchase. These typically range from 2-5% of the loan amount. Understanding and budgeting for these costs can prevent last-minute financial surprises. Components of Closing Costs in Northern California: - Appraisal Fees: Approximately $300-$600 to assess the market value of the home. - Inspection Fees: Around $300 for a standard home inspection. - Title Insurance: Costs about 0.75% of the purchase price to protect against any legal claims on the property. - Escrow Fees: Roughly 1% of the purchase price for handling the closing process. - Recording Fees: Generally around $100-$150 to register the property transfer with the county. - Transfer Tax: In Sacramento County, this tax is about $1.10 per $1,000 of the home’s price. Example: For a $400,000 home, closing costs could range between $8,000 and $20,000. Buyers can get a more precise estimate through a Loan Estimate provided by the lender shortly after applying for a mortgage. 2. Maintenance and Repairs | Why Plan for Maintenance and Repairs? - Every home requires ongoing maintenance and occasional repairs. Older homes or properties with unique features might need more frequent upkeep. Types of Maintenance and Repairs: - Routine Maintenance: Tasks like lawn care, gutter cleaning, and HVAC servicing. - Minor Repairs: Fixing leaks, replacing light fixtures, and minor plumbing repairs. - Major Repairs: Larger expenses such as roof replacement, electrical updates, and structural repairs. Planning for Maintenance Costs: - Set Up a Maintenance Fund: Allocate 1-2% of the home’s purchase price annually for maintenance. For a $400,000 home, this would be $4,000 to $8,000 per year. - Schedule Regular Inspections: Regular inspections help identify potential issues before they become major problems. 3. Utilities and Property Taxes | Understanding Utilities and Property Taxes: Utilities and property taxes are ongoing costs that can significantly impact your monthly budget. Utilities: - Electricity: Varies based on home size and usage, typically between $100 and $200 per month.
- Water and Sewer: Monthly costs can range from $50 to $100.
- Gas: Heating and cooking costs, generally $50 to $150 per month.
- Trash and Recycling: Around $30 per month.
- Internet and Cable: Typically between $50 and $150 per month depending on the package. Property Taxes: - Property taxes in Sacramento County are about 1.25% of the property’s assessed value. For a $400,000 home, this translates to roughly $5,000 per year, or about $417 per month. How to Plan: - Estimate Utility Costs: Research average utility costs in Sacramento County. Your real estate agent or the previous homeowner can provide historical usage estimates.
- Check Property Tax Rates: Understand the property tax rate for your specific area in Sacramento County. Factor these into your budget to avoid surprises.
- Create a Monthly Budget: Include estimated costs for utilities and property taxes in your monthly budget to ensure a realistic understanding of your ongoing expenses. When you take the time to thoroughly understand and plan for these additional costs, you can make a more informed decision about your home purchase on YOUR timeframe and maintain financial stability while putting your mind at ease. For more detailed advice and tools, you can visit: HUD’s Homebuyer Information:  www.hud.gov/topics/buying_a_home Consumer Financial Protection Bureau: www.consumerfinance.gov New Home Source: www.newhomesource.com for specific estimates and detailed assistance in Sacramento County. 4. Consider Long-Term Financial Stability and Job Security: Financial Stability: Future Income: Consider your long-term income prospects. Are you in a stable job or industry? Do you expect your income to increase, decrease, or remain stable? Debt-to-Income Ratio: Keep your debt-to-income ratio low. Lenders prefer a ratio below 36%, with no more than 28% going towards housing costs. This ensures you’re not overburdened with debt and can comfortably manage your mortgage payments. Job Security: Employment Stability: Assess the stability of your job and industry. If you work in a volatile field, you might want to be more conservative with your housing budget. Career Plans: Consider your career plans and potential moves. If you expect to relocate for work in the near future, buying a home might not be the best decision. Alternatively, ensure the home you buy can be easily rented or sold if needed. By thoroughly evaluating your budget, savings, and credit score, determining your ability to afford all related costs, and considering your long-term financial stability and job security, you can make informed real estate decisions tailored to your unique circumstances. This comprehensive approach ensures you’re financially prepared and can manage homeownership or property investments comfortably and confidently. Taking these steps, you mitigate risks and position yourself to seize market opportunities that align with your financial goals and personal needs. This strategic planning helps you achieve and sustain successful homeownership or real estate investments without undue stress.