Mark Galante's Blog
1 ROLLING LANE, Medway, MA 02053
There’s a lot of things to think about before buying a home--some financial, others personal. Most people tend to focus on one or the other. However, both are instrumental in choosing the right house and buying at the right time.
In this article, we’re going to talk about some of the ways you can determine if you’re ready for homeownership. We’ll discuss things like credit scores and down payments, but also important life factors like your career and future plans.
Getting your finances in order
There are a few simple things you can do right now that will help you understand if you’re financially secure enough to start looking at houses. First, you’ll want to look up your credit score.
Lenders strongly consider your credit when determining how much risk is involved in lending to you. A higher credit score can not only get you approved for a mortgage, it can lower your interest rate and make you eligible to borrow without having to pay private mortgage insurance.
The amount of money this saves seems trivial in the short term, but over the lifespan of your loan it can save you tens of thousands of dollars. So, read a free credit report and if your credit is lower than 700 start finding ways to improve your credit.
In the meantime, you’ll want to save for a down payment. While it’s possible to buy a home with a small or no down payment, it can come back to haunt you in the form of interest as you pay off your loan. Furthermore, many lenders won’t pre-approve you unless you make a down payment of a minimum amount (often 20% of the loan).
If you have a high credit score and you’ve saved for a down payment, another thing to check off your list would be proving your stable income. This can be difficult for the self-employed, contract workers, or people who have recently changed jobs.
Lenders want to see that you have a stable income history to ensure that you’ll be able to pay your mortgage each month. If you recently changed jobs or are in between jobs, it could be to your benefit to wait 3-6 months before getting pre-approved. In that time, you can continue to raise your credit and save for a down payment, further increasing your chances of getting a low-interest loan.
Preparing for homeownership
While the financial aspects of homeownership are important, so are the personal aspects. You’ll want to consider several life factors before buying a home.
First, think about your longterm goals. Do you want to live in the same area for the next 10 to 30 years? Will your career bring you to different regions or will you attend school somewhere else? These questions will help you decide if it’s a good time to buy or a better investment to save money while renting.
If you have a family (or plan on having one soon), you’ll also have to find a way to balance all of your living needs.
Finally, ask yourself if you have time for homeownership. Many people who are used to renting aren’t aware of the amount of time and money it takes to maintain a home. You’ll have more bills, you’ll have to mow your own lawn, and you’ll be responsible for maintenance of your home.
The golden rule of house flipping states that entrepreneurs should never pay over 70% of a property’s value after subtracting the cost of renovations and associated fees. Known as the “70 Percent Rule,” it sets a standard for improving the chances of turning a profit even if unexpected financial challenges arise.
Few upstart house flippers have 70% tucked away. That’s why many look to lenders to secure the upfront cash necessary to complete a fix-and-flip project. But borrowing money from sometimes unconventional sources can be complicated. By understanding the pros and cons of financing a fix-and-flip, you can make savvy financial decisions.
What House Flipping Loan Products Are Available?
The majority of loans for flipping houses set repayment terms between 6-18 months. One-year loans rank among the most commonly approved. Some loan products offer entrepreneurs relatively low-interest rates if they have a sound business plan, good credit score, cash-on-hand and assets to leverage. Some sources charge interest rates into the teens but typically set a lower qualification threshold. These rank among the more common resources house flippers access.
- Hard Money Lenders: These resources are sometimes considered a last resort. But the bridge loans they provide fit almost seamlessly into the fix-and-flip process. The relatively short-term financing can be factored into the 70% rule.
- Home Equity Line of Credit: Commonly referred to as a “HELOC,” this loan product allows upstart house flippers to secure a line of credit against home equity. Because the money is secured, lenders tend to offer wide-reaching flexibility about usage.
- Cash-Out Financing: This strategy allows property owners to leverage the equity slightly differently. An existing home or commercial property loan increases as the owner extracts a portion of the difference between what is owed and fair market value.
- Private Lenders: These resources usually lend their capital to help finance projects they anticipate will deliver a reasonable investment return. They may not be associated with a bank or traditional lending institution.
A wide range of borrowing options remains available to house flippers, largely because the industry continues to see substantial growth. In 2019, a reported 6.2% of homes sold were considered flips. That figure rose from 5.8% the previous year. However, the fact that fix-and-flip projects hovered at an 8-year high in 2019 doesn’t necessarily mean newcomers should take out hefty loans.
Weigh Benefits Of House Flipping Loans
Available loan products and resources generally work well with the 70% rule and can be folded into anticipated expenses. That means borrowing delivers the cash-on-hand necessary to press forward with a potentially lucrative project. But the challenges of relying on outside money must also be considered.
- Liens: Hard money and private lenders often require the loan to be secured against real estate. This may include assets in your portfolio or the fix-and-flip property. It’s essential to understand that coming up short on repayment means the lender could end up with the resale profits.
- Timing: Traditional lenders typically don’t move quickly. When entrepreneurs find a property ripe for flipping, sellers may be hesitant to wait. To some degree, that minimizes your negotiating power. In the house flipping sector, the adage “cash is king” holds true.
- Repayment: One factor borrowers sometimes overlook is the fact monthly payments are required on these short-term loans. It’s crucial to include that added expense in your 70% rule calculations and have the cash on hand to avoid defaulting on the loan.
Under suitable terms and conditions, loan products can deliver the financial backing necessary to succeed in the house-flipping industry. But borrowers would be wise to consider all the implications and be sure the loan furthers your best interests.
If you’re a newer homeowner, odds are you don’t really “own” your home outright. Rather, you likely have equity in your home.
In this article, we’re going to talk about what home equity is, how to use it to your advantage, and things you should avoid using your home equity toward.
What is home equity?
Unless you’re one of the lucky few who paid for their homes in cash, you probably took out a mortgage. As you pay off that mortgage you build equity.
Home equity is essentially the value of a property that a homeowner has at their disposal due to paying back part or all of their mortgage.
However, there’s another factor at play in home equity, and that’s market value.
Since the housing market fluctuates, the value of your home does as well, and as a result, your home equity changes with the market value of a house. That might sound worrying, but the good news is that due to something called appreciation.
In the same way that the cost of living tends to rise each year with inflation, so do housing prices. However, appreciation isn’t the only factor at play in the valuation of your house. As your home ages, it will likely need some renovations, which could decrease the home value.
Generally speaking, however, your equity achieves a net gain as you pay your mortgage and the value appreciates.
Now that we know why equity can be so beneficial as an asset, let’s talk about ways to build it.
The best way to build home equity is to repay your home loan. However, more than simply repaying, you’ll want to repay in the fewest number of years to avoid paying more in interest. The longer you take to pay your mortgage, the more interest accrues that could have been used toward other investments.
The second way to increase equity is one we mentioned before--market fluctuation--namely appreciation. To improve the chances of getting a high appraisal of your home, it’s important to keep up with maintenance and make smart renovation choices that will have a high return on investment.
Using home equity
The best use of home equity is to leave it be and increase its value over time. However, that isn’t always possible for all of us. Since many of us need to move before repaying our full mortgage, equity allows homebuyers to use their equity toward their next mortgage.
Another option is to take out a home equity loan or home equity line of credit. Ideally, you’ll only use these loans if you’re planning on using the loan money to increase the value of the home via home improvement projects.
Borrowing against your home equity does come with risks. Since you are putting your share of your home on the line, there is a chance of your home being foreclosed on if you don’t repay the home equity loan. However, lenders typically seek other methods of repayment or settlement before foreclosure.
Everyone is looking for something different when it comes to finding the ideal home. While some people prioritize architectural styles and curb appeal, other house hunters place the most value on the quality of the school district and proximity to jobs.
Neighborhood quality is also a significant factor in house-buying decisions. What exactly does "neighborhood quality" mean, though? Although definitions may vary, the characteristics that are typically considered to be desirable include a low crime rate, relatively light street traffic, a minimal amount of "noise pollution," and neighborhoods in which houses and properties are consistently well cared for and in good condition.
If peace, quiet, and tranquility are high on your list of house-buying requirements, here are a few other items you might consider adding to your "wish list."
Space between neighbors: While it's generally a good thing to get to know your neighbors on a first-name basis, you don't necessarily want to get to know them too well -- or vise versa! In other words, it's nice when you can sit out on your back porch without having to be too concerned about being overheard or needing to edit your conversations. If privacy is a top priority for you, then you might want to limit your search to properties that provide a comfortable buffer zone between houses.
Greenery and privacy hedges: A residential street with green, well-tended lawns and mature, leafy trees is not only visually appealing, but it's also a sign that people take pride in their property and care about the neighborhood. Homes for sale that offer a "park-like setting" on a nice street can be the ideal environment for creating a private, backyard refuge.
Fireplaces: Even if a fireplace is not on your "must have" list, it's a relatively inexpensive luxury to have and enjoy during the holidays and when the temperature drops. Regardless of the climate in which you live, there are going to be plenty of wet, cloudy, or snowy days during the winter months. When the weather turns chilly, there's nothing like a crackling fire in the fireplace to infuse your home with a cozy, relaxing atmosphere!
Large windows: Large bay windows, picture windows, and floor-to-ceiling windows not only let in a lot of natural light, but they also help you enjoy views of your neighborhood and backyard. That combination of sunshine, green foliage, a well-landscaped property, and the smell of freshly cut grass can set the tone for a relaxing home environment -- both indoors and out! Along those same lines, a sunroom can also be a highly desirable feature in a new home you're considering buying.
Although there are a ton of things you can do to enhance the beauty and relaxation value of your next home, the starting point is to find a peaceful neighborhood and a spacious, nicely landscaped property on which to add your own personal touches.