Home : Path To Home-Ownership – Mark Van Dellen – Medium
Let’s discuss homeownership! This guest blog post was written by my long time buddy Mark Van Dellen. Mark’s passion in life is to help navigate the path of homeownership for us Millennials. You rock Mark! If you have any city survival strategies or real estate tips, head on over to my contact page and let me know!
So you think you want to buy a home?
Hi, I’m Mark, a millennial living in an expensive city. No matter where I go (backyard BBQs, brunches, games nights, family get togethers), the conversation inevitably steers towards one topic. Homeownership, the housing market, and how expensive it is if you live (or want to live) in a city! As a millennial working in real estate lending (9 years and going strong), I get asked about the housing market more than most. That said, it’s become a common topic among us millennials. Lately, my conversations are about how there are not enough homes for sale and prices seem to keep climbing. Yikes! However, it is much easier than eight years ago to qualify for a loan (the first step towards homeownership).
Buy vs. Rent
Before diving into the specifics of homeownership and affordability, you need to ask yourself one question. Does it make sense to continue renting, or would it pay to become a homeowner? This question is not always an easy one to answer.
It depends on several factors. In high priced cities like Los Angeles, San Francisco, and New York, renting may seem like the only affordable option available. Other factors might include taxes, the lifestyle you want. For example, do you want to handle home maintenance vs. have a landlord do it for you? Do you want to use your income on life’s luxuries now vs. investing in your future?
Flexibility is another factor. You might want to be able to relocate quickly if a job opportunity or financial need arises. Renting will generally give you that flexibility. On the other hand, homeownership means you get to control your destiny. A rental property owner may sell the property, decide to raise the rent too high to afford, or not renew your lease because they want to move in themselves.
The single biggest factor in the rent vs buy debate is time. When a homeowner, you pretty much have fixed costs, while renting brings variable costs with rising rents. The real estate game can pretty much be summed up in the phrase, “You don’t wait to buy real estate, you buy real estate and wait”.
The Test of Time
For instance, if you were to purchase a property for $650,000 (reasonable price for a condo in San Francisco or Los Angeles) you can put as little down as 5% ($32,500). When you factor the mortgage payment at ~4.875%, mortgage insurance, property taxes, hazard insurance, and homeowners’ association fees, the monthly total payment is around $4,438. That same condo would rent for $3,000/month. In year one, you are spending $1,438 more a month buying the condo. Note that state and federal income tax deductions for interest and real estate taxes on your home mortgage are not included in this analysis, but should be considered.
If you factor in a 3% appreciation rate in the value of the condo and a 2.5% rent appreciation year over year, you hit a break-even point at about the 7th year. Your monthly costs would be about $3,064 having spent $257,391 for both renting or homeownership.
Every year after that for the next 23 years, the numbers skew in favor of homeownership. By year 30, the total cost of owning the home would be $1,040,000 while renting is $1,384,168. Bottom line; you would have saved $343,200 in owning that same condo vs renting!
So what are the steps to become a homeowner?
Pre-Qualification | Pathway to Homeownership
Once you’re ready to take the leap into homeownership, the first step before looking for homes is to get “pre-qualified” so that you know what type of loan you can get and what price range you can afford. Personally, this is the favorite part of my job. I absolutely love assessing my client’s financials to figure out the best loan program for them.
Pre-qualification is a pretty simple process. What it usually entails is having a loan officer complete the loan application with you by providing documentation to prove what you said on the loan application is accurate. The loan application is divided into four main parts; 1. Your personal information (i.e. date of birth and social security number) 2. Income 3. Liabilities 4. Assets.
The loan officer will be pull your credit simultaneously during this process which will complete the liabilities section of the loan application automatically. Next, the loan officer will ask for your last two years tax returns to verify your average income the past two years. Finally, you will provide your last two month’s bank statements to verify how much money you have in the bank.
Once all of the documentation is provided, and the loan application is complete, the loan officer will match a loan program at his/her company with the loan application. At the end of the process the loan officer will give you a price range for a home for which you would be qualified. He/she can also provide a written pre-qualification letter so sellers and their agents will know that there is a good chance you can afford the home.
Loan Programs | Pathway to Homeownership
There is a wide array of homeownership loan programs that exist in today’s economy. Often times, there is a loan that will fit your current financial situation. That said, you may need a credit score above 580 and no recent foreclosures or bankruptcies on your record. The most cost-effective loan with the best interest rate will be when you put at least 20% of the purchase price down and a credit score of 680 or higher.
However, in expensive cities, that might not be an option. The lowest down-payment option available is 3% down for non-veterans or 0% down for Veterans using the VA loan program. Also, if income may be an issue in qualifying, there are loan programs like FHA loans which allow you to have higher monthly expenses in relation to your income and still qualify. The one caveat to FHA loans is that there is an upfront fee as well as a monthly fee for this program.
Finally, if you are buying a starter home, it might be wise to go with an adjustable rate loan for a lower interest rate. For instance, there are “7/1 adjustable rate loans”. Here, the interest rate is fixed for the first seven years and then adjustable every year after based on the current market rates. If you are only planning to stay in your starter home for 7 years or less, this would be a good option. You would have a lower rate than a 30-year loan, and would not have to worry about what rates in the 8th and future years.
House Hunting | Pathway to Homeownership
Next is the fun part! With your pre-qualification letter from your loan officer in hand, you get to shop for a home! I highly suggest using a real estate agent to find you properties in your price range. A good agent can get you into any home you are interested in at a time convenient for you.
The nice thing about being a buyer is that you do not pay a real estate agent; the seller does (typically)! Also, a good real estate agent will understand contracts, inspections, certifications and other legal reviews necessary to make sure you are protected.
The Purchase | Pathway to Homeownership
Once you have found your home and your offer to purchase has been accepted, the transaction process starts. On the lending side, the loan officer will submit the loan to the lender processing department. They gather paperwork and communicate with the escrow, title company and real estate agents.
An appraisal and inspection of the home is ordered next. Once everything is in, the loan goes to an underwriter to verify the loan application matches with the documentation included and matches with the qualification of the loan program.
Once that is complete, the loan goes to the funder. The funder submits the loan documents to the Title Company for your notarized signature. You have the funds to pay the down-payment and closing costs wired to the escrow company. After signature, the loan is funded at the Title Company.
The title company pools the funds from your down-payment, the loan from the lender, and pays out all the third parties like the real estate agent commissions. Once that is complete, the transaction is recorded with the county. That recording means the home is yours and the real estate agent will be handing over the keys to your new home!
Purchasing a home can be a daunting task (especially in today’s competitive market!). First, it’s important to look at the benefits and costs to your personal situation to see if owning a home makes sense. Second, make sure you are pre-qualified before looking for homes to see what you can afford. Lastly, the process of buying a home can be stressful. Just know in most cases it will only take 30 days. You should be kept informed of every turn of the transaction. Good luck!!
Mark is a graduate of the University of Southern California with Bachelor’s and Master’s degrees in urban planning. Buying, refinancing, renovating, or building? Mark and HomeStreet Bank will provide you with the confidence and ease during the loan process.
Mark Van Dellen