You’re ready to buy your first home

Daniel Sharkey from Mariner tackles the complex financial reality of buying your first home, moving beyond the thrill of online listings to demystify the path to true homeownership. He discusses why treating a home as a long-term lifestyle commitment—rather than just a simple investment—may help reduce the stress that often accompanies this whirlwind process.

Learn why looking beyond the initial mortgage payment to account for hidden maintenance costs, utility fluctuations and debt-to-income ratios is a critical skill for new homeowners. Discover how working with an advisor can help you model realistic financial goals so you are better prepared for the long haul and move into your first property with greater confidence that you are setting yourself up for a long-term homeownership.

Transcript

Daniel Sharkey: So, you’re about to undertake one of the biggest financial decisions of your life—buying your first house. Well, this episode we got you covered.

Welcome, everybody. This is Dan Sharkey from Your Life Simplified here at Mariner. And we have a little bit of a unique episode for you today. I’m solo, so the show got a little bit uglier and less interesting, but we’re going to really try to entertain you today with a really interesting topic, and one that I know carries a lot of weight for a lot of people.

We’re going to talk about buying your first house, what that looks like, what are the things that you should consider and how these decisions are going to impact you if you’re a young homeowner or a homeowner for the first time.

Everyone who has had the privilege and gone through this process knows that it’s an incredibly stressful endeavor.

You typically have about 48 hours to think through the largest financial decision of your entire life. But when you think about what happens when you buy a house, it’s not just the numbers. It’s not just, can I afford it? There are implications for where’s my kid going to go to school, what the backyard looks like. The visions of family gatherings and all the special moments you’re going to have in that property. It goes far beyond an actual investment.

So here what we’re going to walk through are some of the things that you can do now to prepare yourself for that event, and all the different considerations that you should have with yourself, your partner, whoever is coming on this journey with you.

The shift to home ownership is a big one. And it’s not just a simple purchase. It really is a long-term commitment. It’s a place that’s going to be the largest cost center of your life for the foreseeable future. It’s not necessarily just an investment, and it carries so many implications for what you want your life to look like.

First, since we’re a wealth management firm, we want to really start with the financial readiness. And this is going to be the meat of what we talk about today. But we’re also going to give you some lifestyle considerations along the way.

So, let’s just say you’ve entered this point where if you’re like everybody else in their mid-to-late 20s or early 30s, you’re probably very familiar with Zillow and Redfin and all the other resources that that are out there.

But what should you be thinking about now before you get to the actual decision point? And there’s one key element to this that I really want to spend a lot of time on. And that is, please, if you’re listening to this now, I hope you’re not buying a house this weekend.

What I mean is that you can be financially ready, you can take all the necessary steps that we’ll walk through in this episode to get to the point that when you enter that point in your life, that you can make this decision, that you’re fully prepared. This is going to be very important for a variety of reasons, not least of which is that the competition, which we’ll talk about a little bit later in the show, is more intense than ever.

Inventories are at historic lows, and there’s never been a lower consumer sentiment about the ability to buy a home for the first time. When you’re in that type of competitive environment, you really want to make sure that you are at the top of the list in your own personal readiness.

Think about if you’re going on a trek or hiking in the woods. You want to be as prepared as you possibly can for all the different scenarios that that may come your way and ensure that you are the most capable position you can be in when that day does come.

So, let’s talk about some basics that we really want you to think about. First, a lot of this is going to be repetitive. I’m sure you’ve heard these tools before and some of these tips and tricks, but they are still critically important to ensure your success. Thinking about what your down payment is going to be. Typically, 20% is a standard number that is used, but why does that matter? Well, when you reach that 20% threshold and nearly every case, you can avoid what’s called mortgage insurance, that’s just an extra fee on top of what you already have to pay to ensure that the standards of lending that you reach provide enough security to the lender to lend you your mortgage.

You also want to make sure you have enough equity cushion, right? How much of the home do you actually go into? Also critically important talking about the competitive angle is making sure that any seller really understands that you have the financial wherewithal to purchase their house.

This is, again, it’s a whirlwind process that is incredibly, incredibly isolated to a period of mere days, and it’s very stressful for everyone involved. The better position that you can put yourself in, the better off you will be.

In addition to making sure that you have liquidity for the down payment, again relative to the sales price. So, when we say 20%, we mean 20% of the overall sales price. There’s a bunch of other considerations that you really need to make sure that you can do now to put yourself in the best possible position. Making sure that you have some extra cash set aside that can be dedicated for everything, like the house may need a new roof, any other moving costs.

If you’ve ever lived—I happen to live just north of Boston. If you ever have lived in Boston and realized that everyone moves at the same time, there are realtor fees and moving costs and other expenses that you’re going to have to absorb above and beyond the sales price. What we often see first time homeowners get sidelined with is they get too focused on what the actual cost is, ignoring those other factors.

Thinking about how much you can actually afford. A good rule of thumb from a debt-to-income ratio is that your housing costs should probably be no more than 35%, and that I would say is on the high side. Ideally, you’re somewhere between 28 and 32% from your income to how much overall debt you will owe.

Speaking of debt, do you have any credit card debt? Student loans? Anything else, a car payment? Please factor that into those ratios when you’re thinking about how much home you can actually afford.

Thinking about what you can do in preparation. There’s also some longer-term factors that you should really be aware of.

Your credit score. Do you know what it is? When was the last time you checked it?

Understanding where your credit is, understanding if you have a partner, what their credit is, if they’re going to be attached to the loan. Those are all critically important pieces that you want to properly account for.

Okay, so you decide that you have the proper down payment, and you’re beginning to think about all the different things that come through.

You’ve looked at your debt to income. Well, have you really looked at the other expenses that are associated with it? Have you thought about the repairs that are needed? The moving costs which I already touched on. The ongoing maintenance. Do you need snow removal, trash, landscaping? All things that as a renter or if you’re living in another property you may not have had to consider before.

You need to factor all of those elements in to really understand the carrying cost of a property. I know we talked about an emergency fund, and as financial advisors, you’re going to hear a lot about that in mostly everything we do because of the security that it provides. But above and beyond that, do you have a separate fund set aside for maintenance costs?

My HVAC just went, for example. We need to paint the house. The house needs new windows. The plumbing needs to get changed. The garbage disposal just broke. And if I’m rattling these off quickly, that’s from personal experience.

So, these are the types of things that you really need to account for. I want to emphasize these are not to ever be considered as emergencies. If you are doing proper planning and thinking about this appropriately, nothing I just mentioned should come as a surprise.

I need to do tree work. The patio has a crack. I need to retile and repave the driveway. These are all things that are predictable, will happen over time and things that you should be absolutely prepared for.

The biggest mistake that we see people make is just thinking about the mortgage in and of itself. And that’s not a good enough reason to ignore these other costs. It’s very isolated. It’s very myopic in terms of what you’re actually focusing on. And these other elements are just as important.

The other thing to consider is what your monthly expenses will change to. Not just maintenance, but do you have to heat a bigger home. Do you need more internet, or is there any other utility bills that will have to be accounted for? Are you now paying for oil or natural gas for the first time?

You’re not just buying a home, you’re buying every future repair, every utility bill and all the other demands that that particular investment will require from you.

Okay. So, you’ve let’s say you’ve considered all of that. You’ve thought through the different processes. You’ve thought through the different elements that you have. And now we’re at time to determine whether or not this is appropriate for you.

So how do I begin to think about those things? Well, what does your income actually look like? I think it’s important to have an honest conversation with yourself about where you are today, and also where you are likely to go.

Not one that’s overly rosy. That you’re expecting a growth in your total income that might be beyond what is reasonable. But not one that is doomy and gloomy either. If you’re younger in your career or still building your bonafides as you grow up and you do expect to earn more in the future, it’s okay to factor that into your planning.

And this is the point in time when I would tell you, making sure you understand what those numbers look like, making sure that you’ve talked with an advisor to help you project forward what your value will look like, what the growth rate of the home will be, what the growth rate of my income will be, and those are all really, really important considerations.

I would also suggest that the expectation of how long you’ll be in that property is really, really critical. Do they have good schools? Do you have a family to worry about? How long do you plan to stay out in the area? Are you planning on moving for a short period of time? Is work secure enough where you won’t be relocated?

The value and generation of home ownership primarily comes from the leverage that’s involved and the forced commitment that you have every month to continually pay and invest in that property. If you’re there for a very, very short period of time, all the costs that that I’m talking about—moving, repairs, maintenance—all the different things that are going to be required of you do not have enough time to really pay you back.

Having some clear vision as to whether or not you’re going to be in that area for at least five years, I would probably argue closer to eight or nine at a minimum, will really give you some really good insight as to whether or not you can afford to undertake this idea.

So, we’ve talked a lot about the things that you need to do, how you can be prepared. And we know that this is a 50,000-foot view. I also want to leave you with some good news and some positive vibes and a green light to undertake this. Don’t just look at the house itself, fall in love with the pictures you find on Zillow.

Really consider the other elements into this decision as to whether or not this is something that you actually want to undertake. I think home ownership, while it’s become a struggle for a lot, and we want to make sure that we acknowledge that, is still one of the best ways to ensure your legacy.

But you want to go into this decision with clear eyes. It’s also okay to push yourself, to put yourself in a position where you might be a little bit stretched. But if you’ve done the work, if you have the emergency fund, if you’ve thought about the other expenses, if you’ve looked at your income, if you’ve done the projections with your advisor to put you in a place to most likely to succeed.

You should enter this conversation with confidence. Don’t get overly enthusiastic. Don’t be ignorant to the steps that are required. Make sure you understand what’s there. But this is a really important element in a lot of lives, and we would really encourage you to go for it. If you haven’t been able to do this work on your own, we’re here to help.

Call your advisor. Call Mariner for the first time. We know that you’re ready to take the step, and we want to make sure that we’re here to help you. So, if you’re excited, if you want to close on your dream house, even if you’re doing it this weekend, make sure you have someone to talk to so you can actually make this a reality and get your keys for the first time.

If there’s anything that feels unresolved, that’s your biggest indicator that you need to do more work, talk to an advisor and make sure that you’re aware of all these steps before you ultimately take the big plunge. It’s a really exciting time for most people. We want to make sure that that dream stays available for everyone and at Mariner that’s our biggest goal. We’ll see you next time.