People want to buy a home for many reasons, like building equity, becoming more settled and avoiding rising rent costs. Financial advisors (FAs) should help clients decide if they’re ready to buy a property and what they must do to prepare.
Buying a house is one of the most expensive and crucial decisions people make about their future. Buying too soon can bring stress and financial pitfalls. You can educate clients on the many hidden costs associated with home ownership and determine the best path forward. Here are some points to consider when helping clients decide if they’re ready to own a house.
Steps to Assess Client Readiness for Homeownership
Sitting down with potential home buyers and looking at their options and financial health is the first step in determining whether the customer will qualify for a loan and can afford mortgage payments.
First-time homebuyers now have an average age of 38 years, an increase of approximately three years from last year’s report. However, FAs must avoid letting age determine a client’s investment ability. Financial health is crucial when deciding if a significant purchase is in the client’s best interest. Five key assessment areas will help determine readiness.
1. Job Stability
A client might have savings and a decent income, but if they’re likely to experience a layoff in a few months, you should advise them to wait before buying a house. Your clients will have trouble keeping up with payments should they lose steady revenue. Inquire how long they’ve been at their current employer and if the company seems secure.
2. Partner Salary
Some clients are in a long-term relationship. If the couple lives below their means, they could conceivably afford a house even if one partner’s income reduces. Crunch the numbers to see if a home is on the horizon for a couple. Encourage them to share details like how money gets spent and how they’d react if one partner lost their job.
3. Savings
Although there are some 0% down homebuying loans — like United States Department of Agriculture and Veterans Affairs loans — clients should have ample savings before becoming homeowners. Low down payments still come with fees and closing costs in many cases.
FAs should also educate clients on the increased costs of 100% loans, such as higher interest rates resulting in higher monthly payments. You can show them figures side-by-side to compare the options, but you should also factor in increasing rent prices.
4. Debt-to-Income Ratio
How much debt your client has can determine whether or not they can afford a home loan. Many people carry loans for vehicles, college and credit cards. The monthly payments of these debts can be overwhelming, allowing little flexibility for a mortgage payment.
Talk to your clients about ways to pay down debt and consolidate for lower interest rates and monthly payments before buying a house.
5. Credit Scores
Mortgage brokers use credit scores to indicate whether a person will make timely payments to repay debt. If your clients’ credit scores are low, talk to them about things they can do to improve their numbers, such as paying bills on time, building credit history and keeping balances low.
Preparing for Homebuying
If you must have a difficult conversation with your client, let them know they must complete a few tasks before moving forward. Here are some areas to help them focus on building up credit scores and preparing for home ownership. The more the person understands home ownership, the more successful they’ll be in the long run.
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Hidden costs: Explain escrow and annual property taxes, which increase the monthly mortgage payment. If they have to pay mortgage insurance due to a lack of down payment, outline how much the rate could be.
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Home insurance: Encourage clients to look at typical home insurance rates and discuss costs with their insurance broker.
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Maintenance and repairs: Keeping a house in excellent condition protects the investment. Every home has ongoing maintenance — including yard work, painting and repairs — which can vary in cost. Prepare your clients for potential scenarios.
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Improvements: They may want to improve some things in their home and should consider the price. For example, installing smart devices can save money on energy expenses.
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Market fluctuations: Consider market conditions. If someone wants to buy a home, will purchase prices rise if they wait? Their 20% down might not be enough if real estate sales increase dramatically. Cover the pros and cons of buying now versus later.
First Line of Financial Defense
As an FA, you serve your clients by ensuring they make an informed decision before embarking on a large financial commitment. Make sure they understand the full scope of home ownership. Together, you can devise a plan that benefits them throughout their lives.
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