- Speaker #0
Welcome to episode three of Millennial Money Matters. Hi, Derek.
- Speaker #1
Hey, Kelly. What's going on?
- Speaker #0
You know, not a whole lot. I just spent a week home with my children for spring break.
- Speaker #1
I'm sure you loved every second of it. It was magical and you'll never forget it.
- Speaker #0
Magical. We fought about Pokemon cards. Lots of fights about Pokemon cards. I don't know if your kids have entered Pokemon card land yet. Oh, it's a doozy. You pay like $8 for this little package of cards. There's like eight cards in the package. Seven of them are trash and your kid cries about them. But there's one like shiny card or holographic card and that card is worth money, right? Not real money, but in their brain is worth money. And it's like they're like, I got to get another package. I got to get another package. I'm like, you don't even play the game. None of my three kids, they all collect Pokemon cards. None of them know how to play the Pokemon game.
- Speaker #1
So there's a game that goes with it?
- Speaker #0
Supposedly.
- Speaker #1
I have no idea.
- Speaker #0
Okay. I've never played it either, but they're very interesting.
- Speaker #1
No, we're not there at all. They have no interest in it. We've never seen a Pokemon anything. So I'm very, very grateful for that.
- Speaker #0
Yeah. Good luck. It'll happen at some point. I feel like kindergarten, first grade is like when all of a sudden they're like, oh, this other kid has these cards and I'd like them.
- Speaker #1
Yeah. I think the FOMO is going to start kicking in soon, but hopefully my kid just never makes friends and we don't have to worry about this.
- Speaker #0
You don't have to worry about this. This was like me hoping my kids didn't want to play sports because that is expensive and time consuming.
- Speaker #1
Yeah. No hockey.
- Speaker #0
No hockey. We're not going to play hockey. Speaking of which, we are going to talk about life with kids post-pandemic here and millennials in housing.
- Speaker #1
Yeah, that was a big impact for my family, although we had really weird timing when it came to moving our house. But I don't know how much you want to get to me yet. But let's maybe talk a little bit about what the overall trends are that we've seen with millennials and housing. And I'll let you kick it off, Kel.
- Speaker #0
Sure. So, you know, talking about millennials and housing, millennials are the number one age demographic buying as first-time homebuyers right now. And it's interesting to me as an elder millennial, the oldest of the millennials, I am on my first home. But my husband's second. He's a little bit older than I am. And millennials sort of are living in one of two camps. They either have not, if you're a younger millennial, you maybe haven't bought your first house yet. If you're an elder millennial, you could potentially be on house number two or you want to be on house number two. And maybe the opportunity hasn't really been right yet because of everything that's happened over the last couple of years. So COVID had an enormous impact on homebuyers and millennial homebuyers, most especially because millennial homebuyers were really in that like the middle of the world. like prime home buying age as COVID hit. So they should have been out in droves purchasing new houses, but they didn't. And it's for a couple of reasons. Number one, people got really scared in 2020 and 2021. Just in like scared on what was going to happen. Were they going to have jobs? Were they going to know where they were going to live? Did they have childcare? All of these things. So they might've like held tight. People also were scared to like go out and go to open houses and those sorts of things. By the time... people got out of that, right, as we moved into 2021, that's when our inventory woes started. So the sort of run on houses that we have right now where there's one house on the market, 44 people make offers on it, and it goes for $100,000 over asking, that really started in 2021. And we're in 2024 now. So we're on quite a few years of these very limited inventory happening. Yeah.
- Speaker #1
And I actually feel like there was pockets of that earlier. So I guess I'll introduce a little bit of my experience with this because I used to live in Boston. And when I first started buying a house, we're looking in 2015, 2016 timeframe. Anytime I was talking to a buddy that was, or a friend that was looking at a house, he said, oh my God, it's the same situation as now. I'm putting in multiple offers. This is my 30th time looking at a house. I put on 12 offers. I've not gotten one of them. So we really were looking at a lot of those similar things. I think one of the things that people look at is, what you don't realize is when you look at a chart of all the housing, new housing builds, it fell off a cliff after 2009. And it has not come back yet.
- Speaker #0
Especially here in the Northeast.
- Speaker #1
Right. So when people are talking about, oh, I'll wait this or that out, there's some things you really need to be aware of when it comes to that, because the experience people are having is, we want these houses. A, they're not building houses. And then I think the other thing we've seen is the older generations that typically have downsized are not doing that.
- Speaker #0
They are not downsizing at all. And that's actually, you sort of hit like three important topics there. Number one, Absolutely, we are missing new builds. So the rate of new build is down significantly post the housing crash in 2008. And what's interesting is we're starting to actually see it uptick a little bit here in Connecticut. However, the price point of those houses are not starter homes.
- Speaker #1
No, well, you can't do that because the regulations are so high, as we saw during COVID, what happened to the lumber prices? Yeah. Through the roof. And, you know, just so if you're a builder, you're gonna be like, okay, am I going to build a 1200 1600 square foot starter home for a young millennial family that's really happy and has two kids? Not a chance. I'm gonna build these mini luxury homes that are 3500 minimum square feet to 5000 square feet. I'm going to make $300,000 because I want this to be worth my time and all this energy and all of this that goes into building a home. You're not going to build these starter homes anymore.
- Speaker #0
No, nobody is. And even condominiums, we're seeing some new condo builds. Those stopped for a while as well, but they tend to be luxury condos. They're putting in $500,000 condos, $600,000 condos, not $250,000 starter home condos. And so you'd say, okay, well, what about the existing housing stock? Can millennials buy existing housing stock? They cannot because boomers, love us some boomers, they're living in that existing housing stock. And for them, it doesn't make sense for them to downsize. So normally what they would do is they would go downsize. to a smaller home, have lower expenses, generally not take a mortgage out. So say they owned a house worth $400,000, they're going to buy a $200,000 smaller home, pack it, half the money, buy it in cash, have limited monthly expenses. Well, those $200,000 houses also don't exist.
- Speaker #1
Right. Well, I'll interject here anecdotally as a financial advisor that has retiree clients. When they do downsize, they don't actually downsize, then they get a smaller place, but it's much, much nicer. So they're actually paying the same price, typically, I've found. So a lot of you that are thinking about retiring and downsizing, that being part of your investment life, good luck with that.
- Speaker #0
Yeah, it doesn't happen. Well, and that's it. And if you even look at 55 and older communities, those are becoming incredibly popular for seniors. The prices on those are not cheap. There's one here in Glastonbury where the average sale price is like $580. So you're downsizing to a smaller home in a 55 and older community, but you're not saving any money on it.
- Speaker #1
And now you have an HOA fee too.
- Speaker #0
So you're going to have to pay for that. But it's one of those things. So you have these seniors that are not, they're saying, well, I'm just gonna stay. I'm gonna, we call it aging in place. They're gonna age in place. And for a lot of them, it's cheaper to age in place. So I get it, right? You know your expenses, they're fixed. If you do have a mortgage, you most likely refinanced it 2020 and 2021, you have a low interest rate, if any mortgage at all. So why would you?
- Speaker #1
Well, plus, hey, the grandkids come to visit. I've got a couple of rooms available. Everyone's happy. Come stay, come on, come over.
- Speaker #0
The problem is the grandkids have nowhere to live. the great kids themselves have nowhere to live because that all of that is sort of taking up the housing stock for the millennials and so they're looking at starter homes but starter homes aren't they're not a thing anymore the other thing that happened during covid is that a lot of those starter homes uh if you and i know that i did it i think everybody sat around during covet in their house is staring at their house i hate that bathroom i hate it i hate my mud room i hate my unfinished basement and then they did those projects So they took their starter home that maybe say they bought it for $289,000 and they improved it. Well, now their starter home theoretically is worth $389,000. But because of market limited inventory, it's now worth $450,000. So that same $289,000 starter home is worth $450,000. We're talking about an affordability issue, right? And that is if rates just stay the same.
- Speaker #1
Yeah, which they have not.
- Speaker #0
Which they have not. So you have people looking at these much higher interest rates. Taxes have gone up. Homeowner's insurance has gone up and people are going, well, how can I afford to buy a home? And I think for a lot of millennials too, there was sort of this thought of where am I living to, right? So we did have some urban exodus where people left more populated urban areas for suburbia, both for, can I telecommute now, right? The rise of telecommuting. I don't need to be in an office anymore. Or if I have to be in an office, it's maybe one day a week or two days a week. Right. So they're like, peace out. I'm going to leave the city where it's expensive. I'm going to go to the suburbs. Well, what did that do? That drove the prices up in the suburbs because you have more and more competition. It also had an interesting effect in some rural areas. So I am licensed in Vermont and I do a lot of lending there. And southern Vermont during COVID was one of the biggest booms in the country. Southern Vermont blew up.
- Speaker #1
What about that?
- Speaker #0
It is wild. And it's actually still going on up there. And it's because people who lived in New York were like, hey, this is a commutable distance to the city. It's like four hours. It's not bad. It's beautiful. The cost of living is theoretically cheaper. It's actually not. But it looks cheaper. And if you're looking, if you're in the city and you're looking at a 1,200 square foot apartment for half a million dollars, you're now looking at a four bedroom ski chalet for half a million dollars going,
- Speaker #1
oh. Not too shabby.
- Speaker #0
It's not so bad. I'm going to peace out. So we're just really seeing all of these. sort of things compound. And a lot of millennials are, again, either struggling because they're living in a house that no longer suits their needs, right? A two-bedroom house, a two-bedroom condo. You now have two kids. I don't have enough bedrooms. My place is too small. I'm in a school system I don't want to be in. Or they just haven't even managed to leave the nest yet. They're still living at home with mom and dad. And we're seeing a lot of that as well.
- Speaker #1
Yeah, I mean, there's definitely a lot of challenges in terms of all that stuff. I think, you know, for me personally, I used to live in South Boston and we had a third floor condo. It was my wife and I and then our oldest came along and it was great, but he was pitter pattering.
- Speaker #0
Bothering everybody.
- Speaker #1
Yeah, third floor is probably like, you know, get the broom and hitting us, right? Like, when are these kids going to get out of here? But then the problem is there's other expenses around that. You know, when you're young and single or like just you and your spouse, you know, you go out, you walk around the city, you have dinner, you come back. It's great. It's awesome atmosphere. When you have a kid, you're... you're like all right now you watch all the young folks going out and you're like oh like why is there a line at 10 o'clock what's going on i mean you know how late it is um so that whole lifestyle just doesn't look as appealing and then you look at all the other expenses around it you're like okay do i go to the public schools which necessarily aren't as great or you know our case daycare daycare was insanely expensive i mean we paid twice as much at daycare in boston as we do now in connecticut wow and like daycare in connecticut's not cheap yeah and they even provide meals It was ridiculous. We were sending our kid to Harvard, basically. It was more expensive to send our son to daycare than it was to go to a local college.
- Speaker #0
And people wonder why millennials have financial issues.
- Speaker #1
Right. So you're dealing with all of that. And you're like, OK, now I can get a house with more space. I have my own yard. So every time I go outside, I don't have to say hi to my neighbor. There's a lot of attractiveness to moving to the suburbs. So I could see why a lot of millennials are shifting from that mindset. Because your life changes. And your needs change. you need to make sure you're kind of can adapt to those different things.
- Speaker #0
Yeah, absolutely. And I think, you know, the other thing that we're sort of seeing with that is that childcare component to it is that we are seeing a lot of millennials moving back towards family, which there was a big trend over the last 10 years where, trying to remember where I read it, but it was like, if a family had two kids, one kid stayed local and one kid moved away. And now that is actually very shifted. Most kids are staying local to their parents. And I think it is because of of COVID and because of the lack of childcare at the time and childcare expenses have gotten so high that to be near a family in an emergency has, I think, moved to the top of the millennial importance list where it wasn't necessarily five or six years ago.
- Speaker #1
Yeah. I mean, we experienced that too because, I mean, my mother was an hour and a half away in Boston and my in-laws were three hours away. So now they're an hour and a half, an hour and 10 minutes away. So it may not sound like much, but there's a huge difference between going three hours to see the family versus an hour and a half or an hour and 20 minutes, basically. So it makes a big difference. And I can really see when you have kids, it's like, oh, my God, you know, you actually want to go out and maybe, you know, date your wife or your spouse at some point. So having in-laws can let you do that. But also when you have older kids and they have school, you know how many things come up and you're like, oh, school's canceled today or, you know, we had an election.
- Speaker #0
The random day off. They're like, hey, April 2nd, there's no school. And you're like, oh, thank you for that advance notice.
- Speaker #1
Oh, yeah, yeah. So we're going to find daycare in like a day. So it's really valuable having family around so I can see the point of, OK, now I'm looking not just. For me personally, where am I going to enjoy my life now that I have a family, I have kids? What around me are we offering from the town perspective, from the schools? What are we offering from our family? And basically, what quality of life are we going to have? Are we going to be in an apartment and we just go to parks? Or is our backyard going to be the park?
- Speaker #0
Yeah. What do you have? And where do you want your kids spending time as they get older? Where do you think you're going to be? Yeah. And I think this can be very discouraging for a lot of millennials. Like, I'm never going to get to move. I'm never going to get to buy a house. And I... get that. I really do. And I think a couple of pieces of advice that I have for people is, number one, multi-generational living is really making a comeback. So we are finding in mortgage lending a lot of multi-generational family home purchasing. So mom and dad going in with their kid and their grandkids to purchase a larger home in an area that suits everybody. In-laws are very popular right now. I have a lot of clients looking for like, hey, can we find a house with an in-law suite so mom and dad can move in with us? That's great because that sort of hits. a couple of different things. Here's your child care. It's also your elder care, right? As your parents age, because millennials are the sandwich generation where we're caring for both our kids and our parents, and that's only going to increase over the next couple of years. So now you can also care for your parents because they're going to age in place. You can sell their home that they need to downsize from, take that equity, wrap it into a home instead of waiting for it to become your inheritance that you don't need at that point. right? It can help shelter everybody and it will really bring those housing costs down, having extra people to help contribute to the mortgage. So that has been incredibly popular. And I get it. If I could rewind time, would I move in with my parents? I would. If I had a house with a big in-law, they could come move in with me. You said dating your spouse. Me and my husband went out on Saturday night. My mom and dad watched our kids and it was great. It was so helpful. So that's sort of one option. Another option is... the kind of multifamily attraction. So people moving into multifamily housing, that's a little bit of a more unique one because that really, especially in Connecticut is location dependent. So like the town that we live in, there's very few multifamily houses. That is not going to be a great solution for people to be like, I'm going to buy a two-family house. Mom and dad or just renters are going to live in one unit. We're going to live in the other. That'll help offset expenses. But in some areas, that can be a very attractive option for people, especially for first-time homebuyers. So if you maybe don't have kids yet or you're just sort of dipping your toe into housing, purchasing a multifamily house where you're renting out the other unit, you're living in one, it's offsetting your expenses, can absolutely kind of help. And then the other thing is just sort of the roommate situation. So I have had some millennials who have purchased a home with the intention of having roommates that were going to help contribute to the rent. I can't include that rent necessarily in their monthly income, but it's something, if you can qualify, say, for a $3,000 a month rent as a single person, and you're like, I don't really want to spend three grand, but maybe you could find two roommates who each want to spend $1,000, and now you're only spending $1,000, which is much less than market rent for a three-bedroom house.
- Speaker #1
Now, just so I'm clear, maybe the audience is clear, the three people maybe watching this or listening to this. When you have, let's say, renters come in, so if they're in your own unit, they won't qualify that for a mortgage. But if you had multiple units, that's when you could say, okay, I can take this in income and add it as income essentially for your qualifications.
- Speaker #0
Exactly. Yeah. So there are some programs that allow border income, which is just people living within your unit. But most programs are, if it's one unit. We're not counting any rent because you're going to be living in that unit. If it's two or more units, up to four units, anything over four units is commercial. If it's two or more units, we can count proposed rent from those other units as your income. And for some people, that may be more than their actual income, right, is this proposed rent. And that can be really helpful in qualifying.
- Speaker #1
So why don't we go through a little bit of, okay, so we've talked about the big challenge we have. How do millennials position themselves for the best place for a mortgage? So what are the things, like if you have a checklist, which I'm sure you probably do, what are the things that you would say, okay, in order to put yourself in the best position for a home offer to reduce your costs too, what should you do?
- Speaker #0
So the first thing is credit. You got to know what your credit score is. It is one of the things that I do every single day that I don't want to say blows my mind because I was very similar before I became a lender where if you had asked me 15 years ago what my credit score was, I had no idea. I had no, I didn't even really know how to look. Like, I don't know. It's like some number. Knowing your credit score is a huge difference between being in a great financial position and not because people don't understand the cost of credit and how tied in your credit score is. Now, a few things to know about credit scores. Number one, it's a bit of a racket. Credit scores are designed to make you have credit. It is a bonus for the credit industry, not for you. So a lot of people think like, oh, well, I don't have any credit cards and I have no loans, so I must have great credit. You have terrible credit when that's the case because you don't have anything. Now, why do we use credit scores? Well, it is a numerical value that puts sort of an overview of how responsible you are with other people's money. That's what your credit score is. How responsible are you with other people's money? We have to know that before we're going to lend you a lot of money because we got to know that you're going to pay us back as a lender.
- Speaker #1
Do you pay your bills?
- Speaker #0
Do you pay your bills? Do you pay them on time? Cool. All right. Yes. Do you max all your credit cards out and you're living on a very thin margin? That's not so great. So knowing your credit score. Now, two things to know about credit score. Credit karma is not your credit score.
- Speaker #1
Never accurate.
- Speaker #0
Never accurate. Credit Karma is using their own credit score modeling called Credit Vantage that you're not using FICO or Fair Isaacs, which is what everybody else uses. So Credit Karma is not accurate. And then the other thing to know is the score that you're seeing on your credit card, that's not your credit score that a lender is going to use. So not only do you have three scores from three different bureaus, you also have different scores depending on the algorithm that is being used to calculate the score for what the purchase you're making is. So if you're trying to get a credit card, we're using one scoring model. If you're trying to buy a car. another scoring model. Trying to buy a house? That is a whole other scoring model. I didn't know that. Yeah. So this is a bit of a racket and it's stacked against you. Okay. So if you have credit questions, I'm happy to answer them. We could do a whole show on it.
- Speaker #1
I think we should do a whole thing on credit.
- Speaker #0
We can do a whole thing on credit. So credit score is number one most important thing because that is fixable.
- Speaker #1
So credit score is-But it will take some time though, right? You can't just, all right, two months later, I'm going to buy a house.
- Speaker #0
I'm going to pump that up. Money is what fixes credit, but it can always be fixed. So I often tell people a year ahead of time. A year before you're ready to purchase, you should be sitting down with a loan officer, you should have your credit pulled, and you should do a full financial evaluation a year out. Because we can fix a lot of things in a year. If you're, and I get it all the time, people are like, oh, I want to buy a house now, my lease is almost up, and then I pull credit and it doesn't work, and now we're like working against the clock. So number one, know your credit. Number two, the other reason why meeting with a loan officer ahead of time really helps is there's a lot of different loan programs available, and knowing what you qualify for. and knowing how much money you need to get into that house. There are some loan programs where you don't need any money. 0% down and your closing costs are covered. Glorious. Do you qualify for that? A lot of people will come to me saying like, oh, I want, in Connecticut, it's called CHAFA, Connecticut Housing and Finance Authority, time to own loan. And they'll say, I want that time to own loan. That's what I'm going to use. I don't have any money saved for closing costs and my down payment, but I'm going to use that. Well, they don't qualify for it. There's an income cap on that program. So I'll get people, I'm like, sorry. And they're like, well, that was my plan.
- Speaker #1
Change plans.
- Speaker #0
Not going to work. So sitting with a loan officer, knowing your credit score, knowing the loan program that's going to work for you. And then the last thing is, and it sounds so cliche, is just saving your pennies. The more money you can have saved for a housing purchase, the better. Now, people a lot of times think that you need 20% down, and that seems so unattainable. And we sort of talked about this on our own that I need to have 20%. The minimum for regular loan programs for an FHA loan is 3.5% down, and for a conventional loan, if you're a first-time home buyer, it's 3% down. So you can theoretically get into a house for fairly limited funds, okay, without necessarily expending a ton of money. You just have to know what you qualify for. You got to know that. And you have to know, like, what is your budget? What are we talking about a month? But truthfully, for a lot of borrowers, if they were trying to rent, okay, first, last security deposit on a rental, and then what you're going to pay a month in rent is often very equivalent to your down payment and closing costs on a house and what you're going to pay for your mortgage.
- Speaker #1
Yeah, I could see that. You know, I think putting my financial advisor hat on for a second, you know, that sounds great. And you always want to make sure what's the cash flow. Right. Because I think one of the challenges I've seen is a lot of times mortgage mortgages will be let you borrow more than you probably can afford or should afford. So just because you can borrow seven, 800,000 doesn't mean you should, but also kind of to your point earlier. Okay. Let's say they let you borrow that amount and you probably can't afford it. Like, but your plan is to have roommates. Okay, great. Like that's it. There's, there's, there's the work around there. So you just really want to make sure, I mean, the price is important. The interest rate's always important. Clearly. But really is, all right, is this going to mess my whole lifestyle up if I buy this house? Like, do you want to be house poor? Do you really just have to sit there? Because then, you know what? Owning a house, stuff happens. Yeah. All the time. All the time. I just bought mulch this weekend. Awesome. Would I like to buy mulch? Never. Never want to buy mulch in my life.
- Speaker #0
Even silly things. We were talking about before. I were redoing a room in our basement and we put some shelving up and I bought bins to put the stuff in. And like, you know, you're like. get those nice plans. All women love bins. We just do. It's like part of the deal. We love, we like to feel organized. They were $20 a piece. I was like, hot damn, $20 bins full of like sporting equipment, like junk. But yeah. And I actually have conversations with my clients a lot about, I don't care what the house costs. That's not the number we're going to focus on. And a lot of times I won't even tell borrowers what their top end. approval number is. And I tell them this, my analogy for that is you never want to try on the wedding dress that's above your budget because that's the wedding dress you fall in love with and you can't afford it. That's the same with knowing how much you can afford in a house. If I tell you you can buy an $800,000, you can qualify for an $800,000 house, you're automatically scrolling that little Zillow bar up to you. I want to see it. If we go by monthly payment, we can back into that number. So if you tell me that your monthly budget is you don't want to spend any more than $3,000 a month on your housing expense, your taxes, your insurance, and your mortgage payment, I will back, and you'll tell me kind of what towns you're looking to buy in, what types of houses, and we will back ourselves into that number. And I will say, okay, you qualify for $500,000. And we never even really talk about what happens above that.
- Speaker #1
Well, let me ask you this because there's, you know, millennials have a ton of college debt. And if I remember this correctly, this is a little while ago, but my mortgage broker way back when told me, correct me if I'm wrong on this, I think it's for every $50 of monthly debt you have, it's $10,000 less you can borrow. Is that correct still?
- Speaker #0
It's mostly correct, but you want to talk about student debt. Student debt does not follow the same numbers as the rest of your debt.
- Speaker #1
Why would it?
- Speaker #0
So here's the reason why. We don't necessarily calculate out your student loan debt the same way all of your installment debt. is calculated out in your revolving debt. So when we're looking at your debt to income, we're looking at a few different items. So we're looking at revolving debt, minimum payment. So if you have a credit card, say you got a $10,000 limit, you've got $2,000 charged on it, but your monthly minimum is $25 a month. We're only counting $25 a month on that card. You might not be paid. You're probably paying a couple hundred bucks. We're going to count 25 bucks. So all your revolving debt works that way. Installment debt, like a car payment, is whatever the payment is. It's $392 a month for your Nissan Altima. That's what we're counting, $392 a month. Student loans are calculated out differently, and they depend on different loan programs. So if your student loans are reporting as $0 on your credit report, which most people's are, especially during the entire time of the pandemic when everybody was on deferment, they reported as $0. Every loan program had a different way that loan officers calculated out what your monthly debt obligation was for that. Some loan programs are 1% of the outstanding balance. Some loan programs are... 0.5% of the outstanding balance. Some loan programs are 5% of the outstanding loan balance divided by 12. We just made it up. If you're on an income-based repayment plan, we might use that as your monthly qualifying number, even though that doesn't amortize, right? Even though that you could pay that for 30 years and it doesn't actually pay the loan off. So it's very complicated, but you are given some grace. The way that we do these calculations for student loans, it's generally a much lower monthly payment than what would actually amortize out. Right. So we're not expecting, I'm air quoting here in the microphone, we're not expecting people to pay those off really ever. And that's the truth for millennials.
- Speaker #1
Well, I mean, that's one of the questions I get asked. Hey, I'm thinking about buying a house. Which debt should I pay off?
- Speaker #0
Don't pay off your student loans.
- Speaker #1
So don't pay off the student loans. And, you know, generally, I feel like the question is, okay, well, what is that really going to do for you as well? Because, you know, sometimes you may actually need that extra cash because is it better to put the cash in the down payment or versus paying down the money? I mean, I'm sure that's a conversation you have with. with a lot of folks as well. But generally, I favor the liquidity. I'd rather have liquidity available because closing costs may be higher than you think, or maybe you do need to put a little extra down that would help you get the offer. So I mean, there's other things that you want to have, make sure you're available to you versus just paying down a debt. And this is the conversation you have with the people that advise you on these things, right? So talk to your mortgage broker. Okay, if I do pay this down, how does that impact me? Pay an extra into it and not paying it off? That probably does absolutely nothing.
- Speaker #0
Does nothing.
- Speaker #1
So cool. You owe $10,000 and now you owe $8,000. No one cares.
- Speaker #0
No one cares. Yeah. It only really works if you're paying off full trade lines. The mistake that some people make though, and this is back to the credit is a racket, okay? People will pay off credit cards and then close them. Okay. They'll be like, oh, well I had $500 on my Kohl's card, so I just paid it off and I closed it. That actually lowers your credit score when you close accounts. Again, super counterintuitive, right? Why? because 33% of your credit score is longevity of accounts, how long you've had those accounts, what the average is. So if you have an account, like I always tell people, I have a JCPenney's card. Okay. I'm 41 next in two weeks, I'll be 41. I have had this JCPenney's card since I was 18 years old. I could not tell you the last time I've had any interest in shopping in JCPenney's.
- Speaker #1
Let's be real. You shopped every week.
- Speaker #0
I shop every week. No, that's what Target's for. That's what Target's for. I don't have a Target card though, because now I know better. But I have this JCPenney's card that I never use. I go into JCPenney's once a year and I buy like socks, something dumb to keep that trade line active because that trade line is twice as old as my next oldest card. So that is part of why I have a really high score is because of this one stupid trade line. It would behoove me to, in real life, I should just close it, right? I don't even use this thing. But in credit life that we have to live in, you have to keep it.
- Speaker #1
You have to keep it and you have to keep using it.
- Speaker #0
You have to keep using it once a year or else they're going to shut you off. They're going to shut you off. So. You know, I think that, you know, your sort of thought on what do you need to do? How do you need to be prepared? What sort of things? Talking to a lender is really the most imperative thing you can do when you are thinking about buying a home. But again, you want to do it long before you're ready to purchase that house.
- Speaker #1
I'll 100% second that. And even as a finance guy, right, I was, I still sat down with my mortgage broker at the time and he mapped a bunch of things out. And as a, as a quote unquote business owner, which I was and still am. We're treated very differently. They love W-2 people. They don't like to own a business. They hate business owners, right? Because they're going to look at, okay, I made X, but I'm going to, because I hate paying taxes.
- Speaker #0
You're going to write stuff off.
- Speaker #1
You're going to deduct things like a normal person because you want to pay as less taxes as you possibly can, but that's going to make you be qualified for a much lower mortgage than you would normally. So that's the thing you want to also weigh and talk about with your brokers. Hey, look, this is what I'm projecting for income this year. This is what I have for deductions. I'm looking out. And this is where the mortgage booking can really help you out and say, oh, if we're mapping in these areas, this is what it's going to look like. Because they're going to look at your tax returns. They're not going to look at your profit and loss statements. They're not going to look at the Excel sheet that you made in your basement. No one cares.
- Speaker #0
We just care about your return. What did you tell the IRS? Yes. What did you tell the IRS? Yeah. And that's the thing. I think with home buying in general is a lot of people, especially with, again, there's a lot of stuff going on in real estate right now, NAR lawsuits, mortgage lending issues. People want to go for the cheap and easy version. So they'll be like, oh, well, I went online and got approved by whatever online big lender because their rate was cheaper. But you're not necessarily going to have somebody really looking at, they're going to qualify you, right? But they're not looking at, how does this work into your full financial picture? How does this work into your law? I'm having conversation with borrowers about like, What's your five-year plan with this house? What's your 10-year plan with this house? People will say, oh, well, in 10 years, we also want to buy a lake house. Okay, cool. Let's take that into consideration. Maybe we only put one of you on the loan and we save the other one's debt to income for the lake house. There's things that we can do to structure that. Same with realtors. There's a lot right now with people, oh, I'm not going to use a realtor. I'm going to go on my own and I'm going to make offers. Cool. Do you know how to write a real estate contract? Do you know what an EMD is? Do you know what a contingency is?
- Speaker #1
No, and I bought two houses.
- Speaker #0
No. Yeah, no, no. EMD is my favorite one. People are like, oh, did you do your EMD? What is an EMD? It's not electronic dance music or whatever. I have people who are like, EDM. I'm like, no, no, it's earnest money deposit. Is you really do need professionals to help guide you. But again, with your loan officer, the further... timeline you can give us, the longer out we can have, the more prepared and the better situated you will be when it's time to buy the house.
- Speaker #1
And I think the important thing to remind you of is you're not wasting their time by doing that. No. Right. You're actually making their job easier because you're not scrambling at the last minute. Like what documents do you have? Like, where are you now? You're trying to get like a history of their bank accounts. I know one thing you brought up to me a bunch of times is the magic of Venmo now. You have to do emojis. So, you know, so there's all these like little things that you don't think of that they have been through. multiple times over. And this is one of the biggest purchases you will ever make in your entire life. Don't mess it up and don't try and be cheap about it. Find someone to help you with it. Get the good advice and create a plan around it and don't try and buy it last minute.
- Speaker #0
Absolutely. No, you hit the nail on the head there. Create a plan. Know what you're looking for. Know what your five-year plan is. You don't have to know exactly, but let's talk it out. Let's talk it out ahead of time and then you can be prepared to buy a home.
- Speaker #1
Yeah. My advice is always, Design your life first and then fit your finances around that.
- Speaker #0
Ooh, that's a good ending note right there. I love it.
- Speaker #1
Yeah, I think we need to stop there. I'm out of here.
- Speaker #0
All right, all right. Well, thanks for listening.
- Speaker #1
Bye, everyone. Talk to you next time.
- Speaker #2
Economic forecasts set forth may not develop as predicted, and there can be no guarantee that strategies promoted will be successful. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
