 Personal Finance PowerPoint Presentation, Starter Home. Get ready to get financially fit by practicing personal finance. Most of this information can be found at Investopedia, what to look for in a starter home, which can be found online. And you can look at the references, resources, continue your research from there. This is by Donna Foscaldi, updated March 6th, 2022, what to look for in a starter home. If you are a first-time home buyer, you likely have a lot at stake. Buying a home is one of the most expensive purchases you might make in your lifetime. And home prices are up, continuing the trend of a seller's market as of February 2022 in most parts of the country. So clearly purchasing a home for an individual, big investment, big process. It's one of those decisions where we want to make sure that we use the adage of we measure twice and cut once. With that, we'll typically not gonna be able to put straight cash down for the purchase of the home and therefore often have to deal with the financing, which will of course complicate the process. So buying your first home takes careful planning and preparation from saving up for a down payment to understanding your mortgage options as a first-time home buyer. Besides the financial challenges, potential buyers' vision of the perfect abode may not translate into what they can realistically afford or their overall lifestyle. That's the typical scenario, isn't it? We want to have a home that's gonna be outside of our price range oftentimes. So we need to be somewhat practical in terms of our decision-making process for the home purchasing process. We gotta actually think about in a bit more depth what it is we're looking for in the home and what it is we can afford, what our resources are. So first-time home buyers willing to approach the buying process from a practical rather than a primarily emotional standpoint can avoid these mistakes. So that is what kind of falls into the longer-term decision-making process. We're not simply making the decision solely with our gut because we haven't been able to train our gut with the long-term decisions. We have to use a more formal process, a more practical process. Doesn't mean we don't look for what we want within the home, but we gotta list out the pros and cons in a more formal way so we can approach it practically, which is more likely to get us the result we're looking for. So sure, high-end appliances may be nice, but so is having mortgage payments that don't strain your budget. So clearly, you don't wanna overextend yourself to the point where you're stressed out about the payment of the budget and so on and so forth. So you wanna find an appropriate mix. So here are five questions to ask yourself when you are shopping for a starter home, can you afford this house? When shopping for a first starter house, some first-time buyers will get pre-approved for a mortgage and then shop based on the maximum they can borrow. Now this is clearly something that you can see why you would do this, why this would happen, right? You go to the bank and you can say, okay, what can I get approved for? And they're gonna say, we might be able to finance you for this amount. And then you say, okay, I'm gonna max out the loan amount and I'm gonna try to get the most house I can based on what the bank is willing to loan me. That's not the right approach typically. Remember that the bank is not the person that's helping you to budget financially. The purpose of the bank is to try to get as much financing as you can have available to you so that it's there in the event that you decide that you wanna take out that financing. In other words, there's a lot of other factors that go into the bank's determination as to how much loan they can give. And some of those factors are strange and can have weird impacts as we've seen in the past, such as being able to sell the loans on a secondary market, having government like interventions into the market and just the economy in general will skew kind of the bank's behavior in terms of how much they might lend. So you can easily find yourself in situations, especially with government incentives where the bank is willing to lend more than someone can actually most likely afford to pay. You would ask yourself, why does the bank do that? Because you would think the bank would be trying to safeguard themselves given the fact that they have risk involved there. But what if the bank doesn't have the risk? What if the bank can offload the loan on the secondary market or something like that? If they don't have the risk and they can get the loan out there and then sell the loan or something like that, then they'll do that, right? They're not doing it to finance or to help your financial budgets. So what you wanna do then, we wanna get the mindset, I'm going to the bank to try to get as much financing as the bank will afford me and then I'm gonna do my own budgeting to determine how much I can actually afford personally and then I'll determine how much financing I need based on our own budget, hopefully and hoping that the bank amount will be more than that, based on the financing that they would be willing to give me. So the FHA or VA mortgages are often good choices for first-time home buyers if you can't afford a conventional mortgage. These national mortgage programs can help first-time buyers afford a starter home, but there are caps not only on the buyer's income but how much house they are allowed to purchase. However, if you are taking out a conventional mortgage and pre-approved for a large purchase price, don't automatically assume you can afford it. Just because you are pre-approved for an expensive home doesn't mean you should take it. So the fact that the money is there for a loan again doesn't mean that you shouldn't do your own budgeting. The higher credit that you can get from the bank that they're willing to give you the more trust that they have in you that you'll be able to repay it, great, that doesn't mean that you should take the money because you gotta pay it back. That means that then you have more flexibility to do your own budget and you can do what you can trust on your own budget from there at that point. So if you buy a starter home, you may want to spend less than you are approved for. If you take on a larger mortgage only because you qualify for it, it may cause financial difficulties down the road. And unfortunately, this often happens mainly on the lower income side of things because that's where the incentives are for things like government intervening in the market and an attempt to help get people into homes and whatnot, but they could create incentives where there's financing that is greater than what people could actually pay, whereas the bank probably wouldn't be allowing that financing if it was under normal kind of market conditions. And that could be bad because that could actually force people into a financial condition that they can't actually afford, but they think they can because the bank for some reason is allowing them to loan, to take out a larger loan, which you're, and we're depending on the bank for the personal budgeting, which isn't what we want to do. We don't trust the bank or the government or whatnot. We just want to be the financing to be there if we need it and then do our own kind of budgeting. So instead of going all in with your first home, it's wiser to look for a more affordable starter home that won't break your budget and leaves room for future expenses. And since most experts say it's best to stay in the home you purchase for at least five years to recoup the costs and see some return on your investment. So usually when you buy the home, unless you're a professional like Flipper or something like that, you typically want to buy a home that you're planning to stay for a bit, for at least on a five-year timeframe because that gives some room hopefully for the loan, for the home to go up in value, but you can't really depend on that for sure. And hopefully for you to be able to pay down on a bit of that loan. So you want to purchase a property you can afford. In addition, the more down payment you can afford, the more built-in equity you have out of the gate. So meaning when you purchase the home, the more down payment you can put, the more cash payment you put upfront. One, that's usually good for the lender. So if you could put more money upfront, the lender is gonna be taking on less risk because more money upfront means that the home value in comparison to the loan value, there's a bigger gap, equity, meaning home value minus the loan value. And if you were to default on the loan, then the bank could foreclose on the home if they needed to and they could sell the home for at least and recover the loan amount. Whereas if you're pretty close, the loan balance is right next to the home value then if the market went down at all and the bank would be at risk in that case and it would also lead to the lender not having as much personal investment and more likely wanting to just walk away from the home. So a bigger down payment can have good effects oftentimes. Does it fit your lifestyle? First time home buyers make mistakes thinking about what they want inside the home instead of other factors such as the distance from work, schools and other necessities. So oftentimes we get this idea and I've seen this happen where basically people are saying, I feel like I should buy a home. I've been told my whole life it's the American dream to buy a home. There's tax breaks to buy a home. I need to take advantage of the home market and invest in a home, but I can't afford a home where I currently want to be or something like that. And therefore the home is purchased somewhere way out. You get a very nice home, but in a place that's not next to the place that you actually need to be where your work is and you end up with a long commute or something like that, which you got to take those into consideration when purchasing the home, of course. As a result, you may be lured into purchasing a property because it is move in ready or has a pool in the backyard or it meets all the buying requirements on your list. But as a first time buyer, consider more than the floor plan and amenities like commuting time and how close your home is to friends and family. So clearly those other factors like work, for example, are gonna be important if you have to actually go into work. Maybe these days more people are not physically driving to work so much, but a lot of people are, of course, and that is gonna take a toll if you're driving a long distance. Not only could it increase your expenses if you spend more money and time commuting, but it can cost you emotionally if you are stressed out from sitting in traffic each day or don't see your friends and family as much as you'd like. And I've commuted to downtown LA from outside of LA and the traffic, when the traffic's horrible, it's, yeah, so it definitely takes a toll. I'd be happy to cut a bedroom off of my home to stop that, but any case, make a list of these lifestyle priorities and factor into your buying decision. What would your future self want? So you can't just think about yourself like now because this is a long-term plan. Most people purchasing a starter home aren't given too much thought to their lives five or 10 years down the road, but not peaking into the future can result in a costly mistake. So that's why I have my crystal ball that I look at all the time. Consider your plans for having children or pets, for example, you and your spouse or partner may not be gearing up to become parents or own dogs in the next couple of years, but that may be a consideration down the road. So, or you may enjoy the convenience of a condominium, but as you grow older, you might want more privacy. Taking your longer range plans and incorporating them into your buying decision can benefit your overall wellbeing. Has the property been maintained? So home improvement television shows make it look easy to do a variety of renovations, but the reality couldn't be further from the truth. So for most people going in and saying, I'm gonna tear down a couple walls. I see a hole in the ceiling right there. I'm gonna replumb the whole place. That's not good for most people unless you really kind of know what you're doing. Even if you know what you're doing, it's gonna cost money to do that whole thing. So you can take that into consideration. Just because you are purchasing a starter home doesn't mean you should choose one that's a fixer upper with a lot of needed upgrades and renovations. So you gotta, I mean, if that's your thing, then obviously that's kind of a specialty area. If it's not your thing, that's gonna be a lot of work. So first time home buyers are better off purchasing a home that has been maintained and doesn't require a lot of repairs or upkeep. Just routine maintenance for a home is costly, not to mention repairs and remodeling. A major, if major repairs or replacements are needed, it might be best to move into better maintained properties. Did you have an exit strategy? Starter homes aren't usually meant to be owned forever, which means you want to purchase a home that has a potential to make you money when you move, when you move. So meaning if you're buying a starter home, then you might be saying, well, I'm not gonna buy a home that maybe can support a family or something that I want in the future. Maybe I'm buying one bedroom, something, or a smaller home without the things that like a yard or something I might want in the future. I'm planning on moving after some point in time, possibly you want to stay in it for that five years is what they recommend or something like that. So you would like to have the plan within your plan that you're able to make money on it possibly or move at some point in time. Obviously those plans all depend on the market conditions and what's gonna happen with the market and things could, we never know how the market's gonna work, right? So you may want to have an exit strategy for the property you are purchasing, whether that means choosing a home that will be easy to rent in the future or quickly sold. So clearly if you're planning on moving at some point, the two options you might have is say, I'm gonna keep the home and rent it, which could be more difficult because then you're gonna have less cashflow up front than you would if you actually sold the home and or sell it. And if you're gonna sell the home, and then of course that might be beneficial to get the money you would need to be purchasing another home. Homes with access to popular school districts, local parks or other amenities like grocery stores may help in tax renters or buyers when you are ready to move to a new home. So clearly when you're thinking about renting something, locate, do I have to say it again? I'm gonna say it, I'm gonna say the real estate thing. Location, location. And I won't say that, I won't say the last one, but you can guess, you can guess what it's gonna be. What is a starter home? A starter home is usually the first home a family or individual can't afford to purchase. So they often, they are often small properties that they buy or to live in for a few years and then sell for a larger or more upscale home. Are starter homes cheap? Contrary to assumptions, not all starter homes are cheap. Obviously it depends on what? Location, multiple factors. So they may be less affordable than houses with more square feet or acreage, but starter home prices depend on numerous factors besides size, such as, here it is, location, type of property and the areas housing market. Should I buy a starter home? Starter homes, AKA small houses or condominiums are usually more affordable than large houses in upscale neighborhoods. That wasn't my question. I said, should I buy? It's a yes or no answer. If you are planning to grow your family or move in a few years, but you no longer want to rent, purchasing a starter home may be a good investment. Yes or no was my question. Providing you can afford it and you stay long enough to build some home equity. So what's the bottom line? Home ownership can be empowering, but it can be a daunting process, especially for first time home buyers. Mistakes are all around on the path to home ownership, but many can be avoided. Start by choosing a starter home that will within your means that meets your current and future wants and needs, but also have an exit strategy in place and don't discount turning your starter home into your forever home if you decide to stay.