Most of us have always imagined that when we grew up, we’d own our own homes. Homeownership feels like a logical next step if you’ve settled into a career, a relationship, and a community. What better way to lay claim to your adulthood than to put down roots and buy a house?
The last 12 months have felt anything but stable, but because of the economic uncertainty that accompanied the pandemic shutdowns, interest rates on mortgage loans have been at historic lows. The lowered interest rates provide an incentive for people to take on mortgage debt during a time when they might be tempted to save that money instead.
While it is obviously important to save money, if you’ve been waiting for a good time to buy a home anyway, then you should consider taking advantage of the low interest rates while they last! As you start down the path of homeownership, you should research and prepare yourself for the process.
From getting a home loan to getting the deed, there is a lot to learn and even then, your job still isn’t done. Owning a home is an ongoing balance of budgeting and enjoying the life you’re building with your family. It’s worth it!
Look for a Loan, Then Find a Realtor
If you’ve never purchased a home before, then the experience can be intimidating. It’s a multi-step process that can be pretty complicated. Fortunately, a good realtor will hold your hand while you look for your dream home but before you bring in the pros, you’ll want to figure out how much house you can afford.
The home loan you qualify for will depend on your credit score and your income to debt ratio. Lenders like to see that your income is equal to, or more than, your debt. For example, if you make a combined income of $12,000/mo., then your debt shouldn’t exceed $6,000/mo. In addition to the loan, you’ll also need cash for a down payment and closing costs.
You’ve probably heard that your down payment should be 20% of the entire cost of the home but, realistically, it can be hard for first-time home buyers to come up with that kind of cash. Of course, the higher the down payment the better, but you don’t have to put a full 20% down. You may also qualify for some federal loan programs, like an FHA loan, or even a VA loan. An FHA loan requires only 3.5% down and a VA loan requires 0% down.
Closing costs are the other expense that you may not think of when you’re determining how much home you can afford. Closing costs go towards things like mortgage insurance, appraisal fees, and title insurance. These costs will depend on where you live and the requirements of your loan, but you can plan to spend between 3% and 6% of the cost of the home on closing costs.
Once you’re prequalified for a loan, it’s time to find a realtor and begin the house hunt. This is the fun part, but it can also be frustrating. When interest rates are low, you won’t be the only ones looking for real estate and competition can be fierce. A good realtor will guide you through the process and help you navigate the inspection, appraisal, negotiation, and closing.
Whose Name Goes on the Title?
Once you get through the bulk of the homebuying process, the last step is the transfer the deed from the seller to the buyer (that’s you!). Many couples don’t put a ton of thought into the names that goes on the title (as long as it’s not someone else’s!), but there can be real benefits or consequences to skipping over your research on this.
Even if you are married and you both live happily in the house, you may wish to have only one partner’s name on the title (aka deed). You may want to do this if you intend to keep your finances separate. Maybe your partner is paying outright cash for the house from the inheritance their grandfather left them, and they simply wish to keep this asset separate.
Similarly, if you want to ensure that your children from a prior marriage inherit the house, then you may want to keep a home titled in only your name so that the property will pass down to your kids. With the help of a lawyer, you can protect your spouse by granting them a life estate interest in the property so that the full rights to the home don’t pass to the children until after the end of your spouse’s life.
Another thing to consider when deciding if both you and your partner’s name should be on the title is whether or not one of you has a significant amount of debt. If a spouse owes a lot of money to a creditor, then keeping that spouse off the title could prevent the creditor from taking the house as collateral for unpaid debts.
The good news is that you can change your mind without going through the hassle of the home buying and selling process all over again. A quitclaim deed is a legal instrument designed to transfer title to real estate without much fuss. If your name is on the deed, but you want to add your partner’s name, you can execute a quitclaim deed that transfers ownership from you, individually, to you and your partner. This results in the house being titled under both names. Similarly, you can remove a name from a deed by performing this in reverse.
The way a home is titled doesn’t have to be complicated, but it can become confusing. When in doubt, reach out to an attorney to help ensure you’ve titled the home in the way that is best for you and your partner.
Prenups and Home Ownership: Protecting your investment.
A prenuptial agreement can help protect any financial assets (think down payment) that you may use to contribute to the purchase of this dream home. So, how exactly can you protect the investment you have made, to ensure that it remains “separate property” and does not automatically become absorbed into “marital property?” Well, first things first- full and fair financial disclosure.
Step 1: “Full and fair disclosure” of assets and debt is very important to the enforceability of your prenup – all the assets and debts that you bring into the marriage must be disclosed. ALL. OF. THEM.
Step 2: Make sure those assets you have fully and fairly disclosed are listed as your Separate Property (you must specify what you would like included as Separate Property in your prenuptial agreement).
Step 3: You may want to add a real estate recapture clause, that states that if you and your future spouse contribute money to a joint venture in real estate (purchase of real estate, home renovations, etc) above a certain dollar amount, then that lump sum amount (above the threshold stated) will be “recaptured” and returned as separate property to the person who made the contribution. This is helpful if you plan to buy a house, but either you or your fiancé will be supplying the down payment.
Want to protect your investment in this dream home? Our recommendation is to get a prenuptial agreement, and to Take. Your. Time. Don’t procrastinate with this very important document, and begin negotiating with your spouse two weeks before your wedding, over a spaghetti and red wine dinner. Give yourself plenty of time to discuss the notion of a prenuptial agreement, discuss the terms, and leave plenty of time for the execution of this important document. Leave time for you each to consult with attorneys if you have questions.
Other Homeowner Cost Considerations
So, now you’re a homeowner (congrats, I love what you’ve done with the place)! Even though the home buying process probably felt like a journey, you’ve really only just begun. Owning your own home is great. You don’t have to ask permission to paint walls or adopt a stray kitten. You don’t have to worry about your landlord popping by unannounced or raising the rent every year.
There are some considerations that warrant extra budgeting and preparation, though. Because even though that bossy landlord won’t be around to tell you rent is late, they also won’t be around to fix the leaky sink or replace the fridge when it goes out.
The average cost of home maintenance for a typical year is just around $1,000. Other, bigger issues can arise, and you might find yourself in need of a new fence, a new HVAC unit, or a new garage door. Expenses can add up, so it’s a good idea to keep some money set aside for a home repair budget.
In addition to repair costs, you will also need to budget for property taxes. Although your mortgage will stay the same from month to month, your property taxes will increase with the value of your home. Property taxes vary from state to state and region to region. For example, the state of Texas has notoriously high property taxes because it doesn’t charge a state income tax. Throughout the nation, property taxes range from 0.28% to 2.49% of a home’s assessed value.
On top of the costs described above, you’ll also need to consider homeowner’s insurance. Your mortgage contract likely requires a homeowner’s insurance policy while you still owe the lender. Even after you’ve paid off your mortgage and own your home outright, a homeowner’s insurance policy is wise. It’ll save you an arm and a leg if someone, say, loses an arm and leg on your property.
Finally, don’t forget about those HOA fees, your remodel projects, and maybe even that new solar roof you plan to install someday. Home ownership comes with a lot of reward, but it can be expensive. That doesn’t mean it isn’t worth it, but understanding the financial responsibility associated with buying and owning a home will ensure your prepared.
Preparing for Success
One key to successful home purchasing and ownership is budgeting for the process early and all along the way. Before you even begin, you should figure out where you want to buy, how much house you can afford and maintain, and how the home will fit into you and your spouse’s long term financial goals.
When planning for your future together, it is always wise to discuss money and asset management, to ensure you and your partner are on the same page. Many find that drawing up a prenup is a helpful step in the financial planning process. This formal, pre-marriage assessment of income and debts before marriage can even provide for how you and your partner will allocate funds for home repair, mortgage payments, and so on.
Julia Rodgers is HelloPrenup’s CEO and Co-Founder. She is a Massachusetts family law attorney and true believer in the value of prenuptial agreements. HelloPrenup was created with the goal of automating the prenup process, making it more collaborative, time efficient and cost effective. Julia believes that a healthy marriage is one in which couples can openly communicate about finances and life goals. You can read more about us here Questions? Reach out to Julia directly at [email protected].
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