Get your financial house in order
Before you start looking at listings or making big decisions, you need to make sure your personal financial house is in order. This acts as the foundation for your new home. If the foundation isn't solid, you may notice cracks over time.
Start by ensuring you have an appropriate emergency fund and a clear strategy to manage any existing debt. You also need a healthy credit score because this can substantially impact the cost of your mortgage. Finally, don't forget about your future self; you should have a roadmap in place to save a little bit of money for retirement even while you save for a house.
Understand the psychology of buying a home
It is well documented that people tend to make poor financial decisions during periods of heightened stress and high emotion. Buying a home elicits both of these feelings. If you aren't careful, a strong emotional reaction to a specific property can nudge you toward a decision that isn't actually in your best interest.
Counteracting emotional decisions
To avoid this trap, you need to be aware of your emotional responses and actively counteract them. We recommend making two specific lists:
- What you value: This might include time with friends and family, a short commute, an active lifestyle, or career opportunities.
- What you want in a home: This could be minimal maintenance, a yard, access to parks, or space to entertain.
Keep these lists with you when you are shopping for a home. The more you anchor yourself in what is truly important, the more likely you are to make a smart and informed decision.
Work with the right professionals
To navigate this process with confidence, you need to create your own "dream team" of experts. There are three specific professionals you need in your corner.
1. Mortgage loan officer
This person helps with everything related to your loan. They will approve you for a specific amount and monthly payment. They are also there to educate you on down payment options and inform you about any first-time homebuyer programs available in your state.
2. Real estate agent
A good agent is essential for your search. Beyond just finding the right home, they help you determine a fair price, make your offer, negotiate with the seller, and guide you through the closing process.
3. Financial planner
Working with a planner is one of the best decisions you can make. They provide unbiased advice regarding your down payment and loan options. They also help determine how much you should pay for a house, what level of insurance you need, and how this massive purchase affects your other life goals.
Know how much house you can afford
The most important thing to remember is that the responsibility of owning a home goes far beyond just the monthly mortgage payment. You need to look at the full picture.
The monthly payment rule of thumb
A great place to start is the 28% rule. Ideally, your total monthly expenses related to the house should not exceed 28% of your before-tax income. Keep in mind that this figure must include principal, interest, taxes, insurance, and maintenance costs. Please do not underestimate the cost to maintain a home.
Approval does not equal affordability
Just because a lender approves you for a loan amount doesn't mean you can actually afford it. Loan officers can approve you for a payment that is over 40% of your before-tax income. However, for your own financial health, you really want to be closer to that 28% number.
Let's look at the math
Here is an example to illustrate why the difference matters. For simple math, let's assume you make $10,000 per month before taxes. After taxes and benefit deductions like health insurance and your retirement plan, you may only bring home about $6,000.
If your mortgage payment is 40% of your before-tax income, that is $4,000. While that fits the lender's criteria, it is now 67% of your actual take-home pay ($4,000 divided by $6,000). This wouldn't give you much wiggle room in your overall budget for anything else.
Don't forget the added costs
You must account for moving costs and new furniture, which can add up to thousands of dollars. Also, every new homeowner eventually learns they will be "50 dollar'ed to death." This includes light bulbs, cleaning supplies, pots and pans, towels, and the list goes on. If you have projects planned, like new paint or floors, those costs need to be in your roadmap before you buy.
Seeing the bigger picture
When buying a home, don't limit your view to the next 6 to 12 months. Think about the next 3 to 5 years. Will you get married, start a family, or change jobs? You need to consider other milestones like saving for education or buying a new car. Buying a home needs to be part of a broader strategy, not a standalone decision.
The Facet difference
At Facet, we believe your financial roadmap should account for all facets of your life, not just your investment portfolio or your mortgage. We don't just help you run the numbers; we help you understand how a home purchase reflects your values and impacts your long-term wellness. Our membership model gives you access to a dedicated team, including a CFP® professional, who can offer unbiased advice to ensure you're celebrating your new home rather than regretting the purchase.
