What Issues Should I Consider When Buying A Home?

Buying a home is one of the biggest financial moves that our clients will ever make. There are a number of issues they should be aware of, including how the costs of purchasing and owning a home will impact their overall financial planning goals.

In this checklist, we cover a number of financial issues that our clients need to consider when buying and owning a home, including:

• Cash flow issues, such as the costs to maintain the home once they own it, the impact that owning a home will have should one spouse need/want to stop working to raise children, as well as how long they intend to live in the home.

• Financing issues, including your clients’ debt ratios, qualification for advantageous mortgage terms and/or special lending programs (e.g., VA loans), and the loan application process.

• Income tax and estate planning issues, including mortgage interest deductibility, basis tracking, and how to properly title the home.

• Insurance issues, including property and casualty policies, and appropriate levels of life insurance coverage.

This is a comprehensive checklist of the types of issues that advisors should be discussing with their clients who are considering purchasing a home. Clients are not always fully aware of the financial ramifications of such a major decision, and it is our role as their advisor to ensure that they are equipped to deal with these issues, allowing them to enjoy homeownership to its fullest.

Transcript:

Hi, Todd Pouliot with Gateway Financial. Feel free to visit us at www.mygatewaymoney.com. And, I got another exciting checklist here for you. Buying a home is one of the biggest financial moves that our clients will ever make. There are a number of issues that they should be aware of including how the cost of purchasing and owning a home will impact their overall financial planning goals. This checklist we're going to cover a number of financial issues that our clients need to consider when buying and owning a home including cash flow issues, such as the cost to maintain the home once you own it and the impact that owning a home will have should one spouse need or want to stop working to raise children as well as how long they intend to live in the home. Number two, financial issues including your debt ratios, qualifications for advantageous mortgage terms, and/or special lending programs such as VA loans and the loan application process. Third, income tax and estate planning issues including mortgage interest deductibility, basis tracking, and how to properly title a home. Insurance issues lastly, including property and casualty policies and an appropriate level of life insurance coverage. So, I think this is a comprehensive checklist that covers the type of issues that advisors should be discussing with their clients who are considering purchasing a home. And, clients are not always fully aware of the financial ramifications of such a major decision. And, it's our role as their advisor to ensure that they are equipped to deal with these issues and allow them to enjoy home ownership to the fullest. So as we always do, we're going to come and share our screen with you to show us the checklist and we should have a good view here. Cash flow issues. Do you need help determining how much it will cost to own and maintain your new home? Just having that mortgage and insurance and everything does not cover everything. So, mortgage payment, property taxes, homeowner’s insurance, and hopefully, there is no PMI. Also, the cost of utilities and maintaining a property. And also, are there any commuting costs that might be adjusted? I know when I was a youth, my father used to drive an hour to work and that was an expensive cost he probably did not calculate on how much time he would spend driving to and from his office. Child care and also private education if you're not living in an area where you want to send your child to the local public school. Any changes or improvements to the property that you may need to make? How are those future expenses going to impact your financial situation? And, will the purchase impact the ability on other goals that you may have? There's always trade-offs in life there's reaction, and equal and opposite reaction. And, ability to save for retirement. Prioritize your goals, set them all out and then rank them in an area to understand those trade-offs. And, do you have a spouse or partner you plan to live on one income? So, you could have a stay-at-home parent situation with children. Consider how the new home and carrying costs fit within your budget and make adjustments accordingly. And, will you be living in the home for five years or fewer? If so, consider doing a break even analysis to see if it may be more practical to rent rather than to own. Recently, we've had a situation where a couple came to us did not want to go to the local public school and the cost of the private school they wanted to go to was a little excessive for their plan and their budget and they considered moving to a new location. Was it better to buy a home in a new location or was it better to rent that home. So, a great thing to think about if it's only a four-year situation. And you know, what do you do? Do you stay during college? And, that's another four years so those are the considerations that you need to make. Any mortgage related issues up next? Do you need assistance in considering the financial impact of different types of mortgages? Not only just in years, look at the terms on fixed and variable rates. Big topic of conversation is, we've had historically low rates now we're seeing them climb back to what i would call normal. A 5% 30 year fixed rate is to me, normal. In fact, it's much cheaper than the first mortgage I ever got which was 8.25% and we thought we were getting a good deal back then. Look at FHA loans to conventional loans. And, reverse mortgage may make sense in some situations. I'm not a huge fan of them but they are an option to look at. Did you serve in the military? You may be eligible for a VA home loan. Might offer you a lower interest rate. And, do you need assistance in evaluating competitive interest rates? Just don't go with one bank. Possibly, look at a broker or do some online research. Mortgage payment, P and I, property insurance taxes – 28% of your gross monthly income. Starting to get a little edgy there on the budgeting aspect so make sure you understand that they may not be willing to lend you the money. One of the things I have found over the last uh several years doing this, banks always offer you more money than you should spend on a house. Be cognizant of being house poor and make sure you are living within your income means. Are you retired and have no earned income? They may look at your portfolio and that's when you want to have your advisor there by your side helping you with the portfolio. Also pensions and social security may also be taken into consideration. If you have other long-term debts, look at that ratio of 36 percent or more of gross monthly income. May not be willing to lend you the money again. Again, I get a very nervous when I hear about people coming too close to those numbers. Cash flow and budgeting are very important, don't be house poor. Do you have a low credit score or poor credit history? Remember, review your credit report to ensure there's no inaccuracies. You can do that annually. I highly suggest everybody does that annually. And, you may be charged a higher interest rate or denied a loan. Understand what that costs you monthly, yearly, and the total life of the loan if you have low or poor credit. And, improve your credit score, pay your bills on time, and reducing your debt load. Do you anticipate making any large purchases or closing cards in the months leading up to the purchase of your home? Make sure you do not rock the boat you want that mortgage to go through very very smoothly. Just talk with your lender, “Hey, you know, here's what I'm trying to do, here's what I think I should do.” Make sure you don't make any large purchases just prior to that mortgage closing, you could radically impact the rate that you get. Down payment and closing related issues. Do you need help to determine closing costs? Loan origination fees, processing fees, points, attorney fees, these all add up and can add to the cost of owning a home. And, do you need assistance on how much of a down payment you should make? Paying conventional loans, put less than 20 percent down, you may be subject to PMI, private mortgage insurance. And, emergency fund issues and how different loan amounts impact your cash flow. Again, don't be house poor. Do you lack liquidity and need assistance in determining how to fund the down payment? Consider if you have a Roth IRA, again some of my other videos I talk a lot about Roth IRA, contributions can be withdrawn without penalty at any time after that five year clock, and $10,000 of earnings can be removed without penalty or tax for the first time home purchases as long as the Roth account has been open for at least five years. So, sometimes it's better just to open up a roth account just to get that clock started. And again, you can play with that on a tax advantage basis. If you have a traditional IRA, 10,000 for penalty-free for first time home purchases. Incomes taxes still do apply so be cognizant of that. Work with your tax accountant, your CPA or your enrolled agent. In a 401k, some plans have loan provisions. I am against loans in 401ks typically, but in-service withdrawals and loans are an option for you. And, there's sometimes down payment assistance programs that may be available to you. Alright, here we get to the big tax planning. Will property and state income taxes exceed ten thousand dollars? If so, you will not be able to deduct any amount over ten thousand dollars. This all leads back to the Tax Cuts and Jobs Act of 2017. Remember that sunsets in 2025. We also do have a different administration which may lead to some more tax changes prior to that so make sure you're aware of all the tax laws that you need to be aware of for tax planning. Not just tax preparation but tax planning, look forward. The mortgage debt exceeds $750,000? If so, you will not be able to deduct the interest on the debt exceeding $750,000. That number it seems large in some areas, in some areas it seems small so depending on where you live that number can be small or big. Will you use part of your home for principal place for your business? Consider home office deductions. We're seeing a lot of work from home people now or people that are starting a side hustle and that becomes their main source of income. And again, it must be used exclusively for business purposes. Do you plan on making improvements to the property? Track the cost of improvement so they can be added to the cost basis reducing your gains when you eventually sell your home. Should your home be owned by one spouse or owned by a trust. Trusts can avoid probate. Now, I'm not a big fan of trying to avoid probate. It's not as strenuous as most people think but that is a way to avoid some probate costs there. It might be important for properties that are located in different states than where you reside. And, that's where people find that it's strenuous going through probate. And, some states allow a transfer on death or TOD deed. Love that, highly recommend that, but again, every situation is different. I love the TOD deed. And, will this purchase require you to update your estate plan? Pretty much this is a yes, so make sure you update your estate plan when you move forward. And, any other issues that we have here is a second home or a rental property. How should it be titled? Any potential liabilities? Possibly use an LLC to protect yourself from personal liability. And, will your need for life insurance change in the light of the new mortgage? So, you have a lot more debt out there, and if something should happen to you make sure you have enough life insurance. And, that's where some very good inexpensive term policies can come into play. Review your home and auto policy. There might be cost savings for bundling with one carryer or one insurer. And an umbrella policy. Highly recommend these. They’re very inexpensive normally. Increase the limits if you already have one as well. And, any state specific issues to consider? Some states offer tax benefits for homeowners. Again, I will caution you because of that Tax Cuts and Jobs Act, people say, “Well, the mortgage is deductible, the mortgage is deductible.” Well, that's no longer the case since they've doubled the standardized deduction a lot of people aren't reaching that. I forget the exact stat of how many people take a standardized deduction but it's pretty mind-blowing how many do so don't think that the interest deduction is something to look forward to rather paying that debt off may be a better way of doing that. And, is a home purchase a result of an employment change? We're seeing people migrate a lot between companies, jobs, careers, wherever and may be eligible for relocation assistance from your employer. And lastly, there are some online tools that's not in our checklist here yet but some cities are actually paying you to move there if you fit into their parameters for what they what they'd like to do so that's another thing to consider if you're considering transferring to a different city or a different state, there's some economic benefits for that as well. But this is a very in-depth checklist, a lot of deep thought that goes into this, a lot of calculation that goes into this. The price of homes over the last few years has skyrocketed. Very very low interest rates. People are in bidding wars to buy homes. You know, how does this affect your financial plan? We're seeing people 50,000 overlist. How am I competing with this? How are banks underwriting these loans? A lot of things that are out there about home purchase right now that is very scary if you're a buyer and as a seller you know, “I'm gonna sell my home but now where do I move to?” So, this is a great checklist, I hope you enjoyed it. Again, we really need that thumbs up and that subscribe so we can keep you informed. And, I hope you're sharing these videos with your friends. Don't forget to ring that bell and we'll keep these videos coming. And, thanks again for watching.