Budgeting 101

Speaker 1: [0:00] Hello, and welcome to the Awesome in Seattle podcast. This is Christian Nossum of the Awesome Nossum Group at Wilson Realty, and I am really excited about our topic today because I think it's really gonna help a lot of people, especially first-time homebuyers. We are gonna talk about budgeting and the steps to take to see if you are ready to move from renter to homeowner. Let's say hi to our team real quick so we can get their experiences and tips on this as well. First off, we have the one, the only, the data guru, Jason Saldarriaga. Hello. We have the Seattle native like myself- The beautiful Reid Watson.

Speaker 2: [0:40] That's me.

Speaker 1: [0:42] And the dog whisperer, the one and only Les Cutting.

Speaker 3: [0:47] Hola, amigos.

Speaker 1: [0:50] All right.

Speaker 2: [0:50] Hello.

Speaker 1: [0:51] So, as I'm sure all of you guys can attest to, buying a house for the first time can be very intimidating, and a great way to start off on the right foot is to really know and understand what you can afford before you ever go to look at properties. That is the key to budgeting. Today, we're gonna break down the simple steps to make budgeting less daunting when you're shopping for a home so that you can have a more enjoyable experience, less stress, and really just a lot more fun. The Awesome Nossum group, we are a team of experts, and we're ready to share our experience and give you some guidelines and insights on how you can save some time. By following our steps, you're definitely gonna save some time, and make sure that you don't end up disappointed, um, so you can actually get the house that matches your budget and your needs. First off, Les, why is budgeting so important when it comes to buying a house or even deciding if you're even ready to buy a house?

Speaker 3: [1:46] It matters because you know what's available to you already within your budget. Um, maybe the better question is, is why establishing a budget is important before looking at homes, and I'm gonna tell you why. Because I like to use this expression, sometimes our eyes get bigger than our wallets. You know what I mean? And you start looking at a house, and then you actually figure out what you can actually afford, and then every house you look at after that, it just isn't as sexy, and then the experience is just disappointing. I've seen this a few times where people, they go out of order. They start looking at Redfin or whatever app they look at, start looking at houses. They're like, "Ooh, maybe I can get this house. Maybe I can get this house." And then once they get their budget dialed in, they're severely disappointed at what they can actually afford. Don't go out of order. Your expectations get skewed when you start looking at houses beforehand.

Speaker 1: [2:35] Yeah. It's tough to look at houses before you really verify what you can actually afford because generally what you think you can afford is often more than what you can afford, and then it's just every house after that looks disappointing. It's, uh, it's important to start at square one. So Reid, let's say that I am a client, I'm the home buyer, wanna-be home buyer, who is ready to get started. What should a conversation with my lender, mortgage broker, whatever, look like? Like, what questions would they be asking me when I talk with them?

Speaker 2: [3:10] Right. Well, the first one is almost always how much are you spending on rent right now? Because ideally you are comfortable with your rent payment, you know, you're not overextending yourself, and so that's kind of a good baseline to start out with. Then they're gonna ask you, do you have a good idea of your total expenses? And if you don't, it's a really great idea to either sit down with a CPA, sit down by yourself, and figure out exactly where your money is going. Do not inflate your spending capacity. So be really conservative and just look at, you know, this is how much I'm spending on rent, this is what my car payment is every month. You know, if you're an independent contractor like we are, make sure you have your healthcare payment in there. Every type of monthly expense, figure out what all of that is, and then how much you have left over, and are you comfortable with that? Then the next thing they're gonna ask you, what do you have saved for a down payment? And a lot of people think that, oh, I need to have 20% saved for a down payment, and kind of try and scramble or make up what they feel is 20%, but don't get too distracted by the percentage. It's more important to identify what you have saved that you can actually spend on a down payment. You don't want it to be 100% of your savings. It can be a chunk of your savings. You do, do wanna have a little bit left over in case of emergency. You wanna have a little bit left over for closing costs, all sorts of stuff. You wanna be able to furnish your place. So find a down payment amount that you're comfortable with. Again, it doesn't need to be 20%, and that's something that a lender can help you figure out, too. And then that down payment, along with the monthly expense you're comfortable with, is gonna really determine, and a lender can help you determine, what type of a home you can afford. The most important question really, though, that is why we like to be a part of the process as real estate agents, is because we want to make sure that you are spending what you want to spend versus what you could spend. Again, with, like, online, uh, lenders, big banks will often just tell you, "Okay, this is the max amount that you could afford," and send you out with that preapproval, and you know, you're all excited. You see a house you love, you buy it, and then you end up being what we call house poor, which means that you don't have money to do other fun things or, you know, go on traveling, expand your family. So focus on what you want to be spending, not what the bank tells you is the max you could be spending, and I think we're gonna say that a lot through this episode. Focus what, focus on what you want to afford, not what you could afford.

Speaker 1: [5:42] Yeah, that is a fantastic point. You don't need 20%. Most people don't have 20%, so be- you're okay if you don't. Um, and making sure- Especially,

Speaker 4: [5:53] especially when you're a first-time home buyer.

Speaker 1: [5:55] Exactly. Right. Exactly. And it's really important to focus more on what you're comfortable using for your down payment than maxing yourself out, and that's just makes things stressful. Mm-hmm. Don't do that. Okay, so let's still go back to me pretending that I am the potential home buyer. I took step one, I figured out what my current expenses are. I did step two, determining if I have enough for a down payment. Jason, what should I do to determine if I have enough saved for a down payment, and if I'm ready to even buy a home, if this is a good idea or not?

Speaker 4: [6:24] Yeah, not to turn this into some kind of marketing ploy for ourselves, for the Awesome Nossum group. Um, but honestly, the best step forward for you, um, to really understand your whole budget and all that goes into it, is to sit down with us and do what we call a strategy session. And that's where we sit down, bring a lender in, and really take the time to understand where you're coming from, where you're going, what your goals are. Because quite frankly, there are so many variables to this puzzle, and at the end of the day, there's not necessarily one way to get to your goal. There could be multiple. And it really, I think, is best for you as a buyer to find a team who's willing to spend the time to explain all those options and work with you to figure out your path forward, as opposed to just kind of what Les was saying earlier, you know, getting a preapproval from some algorithm and saying, "Okay, well, I guess I can afford $800,000 house", and at the end of the day, not actually wanting to afford that. During the strategy session, and to answer your question more directly, Christian-

Speaker 3: [7:37] Mm-hmm … Speaker 4: you know, we kind of work backwards, and I think this is the best way for a buyer, regardless of whether you're working with us or not. First off, start with what you pay a month in rent, how much you want to pay a month in mortgage. Usually, it's around the same. Th- you know, you're using your rent as a basis, so you know, okay, I'll, I'm willing to spend $500 more or whatever it may be. And then figure out how much you have for a down payment. You can go online and find tons of mortgage calculators. Some of them are really simple, some of them are very customizable, tons of variables. But at the heart of each of them, you input home price, you input your down payment, whether that's a fixed amount, you know, you might have $100,000 saved, or a percentage, um, 20%, 5%. And there's some other variables you can play with, and it'll shoot out your monthly payment. Sometimes you can input certain other variables, and it'll output the home value. So you can play around with this. It can be a great starting point just to get a sense of the, uh, field you're playing in. Just to throw an example out there, this is very simplified. Let's say you're looking at buying a home. The price is $750,000, which is pretty average in Seattle. I think last month it was a little higher than that. You're hoping to put down 10%. Interest rates are, let's say, at 3.5%. Your monthly payments would be at around $3,800 a month. That is including principal, interest, taxes, insurance If you then reduce your down payment to 5%, that would increase your monthly payments by only about $200, up to $400… $4,000 a month. So-

Speaker 1: [9:30] That's crazy

Speaker 4: [9:31] how- Yeah, it can be kind of surprising

Speaker 1: [9:32] how small that is. Yeah, that's super crazy how small that is. I thought, even though we're in this business, I thought that would be higher. So,

Speaker 4: [9:38] interesting. Yeah, and, and it really depends on your situation, of course, and- True … interest rates can make a big difference on this. And that's why it's really important to connect with a lender who's willing to really run these numbers for you, instead of just shooting something at you and saying, "All right, this is it. You know, you can get a million dollar home, but your payment's gonna be $6,000 a month." You don't necessarily want that. Keep in mind, if you are currently paying close to what we just threw out there in terms of cost in, in rent each month, and you have a down payment saved up, this is very likely a good indicator that you might be in a good position to stop renting, and might be, uh, well positioned to buy a home. So keep that in mind. And even if you- these numbers don't align with what, where you, where you are currently, it's never a bad idea to connect with an agent to chat about your situation and maybe get a game plan. So instead of it taking 10 years to get to a place where you can purchase a house, um, maybe you can speed that up dramatically.

Speaker 1: [10:34] Yeah, that's a great point. All right, so I'm going back to me pretending I'm a buyer. I have now figured out what I can spend every month. I've determined that I have enough for a down payment, but I have no clue what a mortgage is, how to get one, anything like that. So Les, can you help me understand that? So I'll step back real quick. So just so you guys all know, we are only real estate agents. We help you look at houses, and make the offer, and negotiate the offer to buy the house. A mortgage broker is really someone that actually helps you get the loan to buy the house. So two completely separate jobs, I should say. So just wanna throw that out there. So anyways, back to that. Les, what do I do? I know nothing about mortgages. How does this all work?

Speaker 3: [11:18] All right, now that you got your budget all dialed in, you figured out how much you wanna spend a month, you got your down payment together, next step is to talk to a mortgage lender. As Reid pointed out, you wanna figure out what you want to spend versus what you could spend a month time. Um, you don't wanna be house poor, 'cause if you're house poor, you don't get to do all the fun things like go out with friends, have dinners, go on vacations, that kind of thing. You're just gonna be putting a bunch of money into a house, and that's not very fun.

Speaker 1: [11:45] Yeah, so- Going back to me pretending that I am a potential home buyer, now I got my budget. I'm really excited to figure out what kind of a house I can go look at. Thanks to you guys, 'cause of the Awesome in Seattle podcast, I know that I only wanna look at houses that are actually in my price range. I don't wanna look at houses I can't afford, 'cause then I'm only gonna be disappointed. This is where we, as the Awesome Nossum Group, do something that's pretty unique. I don't know why no one else does this, but it's something that we do 'cause it just makes common sense, and that's something that we like to call a sold search. Now, a sold search is basically where once you get your budget figured out and you know your criteria and the areas you wanna live, we show you what has recently sold in those areas so that you can learn what's actually happening in the market, and so that you can get calibrated to this market. In the current market that we're in, it's extremely competitive, and often what the asking price is is nowhere near what the final sales price is. So, this sold search really helps with that. So this is how we help you understand what price range you need to be looking in. Reed, now that I'm out of my real estate agent guy, now I'm back to potential home buyer, how should I stick to my budget?

Speaker 2: [13:00] Yeah, you should just stick to it. Um-

Speaker 1: [13:04] That's a really good point. Wow, I never thought of that. Good job, Reed.

Speaker 2: [13:07] Yeah. It's not just a suggestion. It's, um, in your best interest, obviously, and ideally you are the one who came up with it, so you should be comfortable with it. And the only time I think it's appropriate not to stick to your budget is if you go lower, right? If you find a great deal and end up spending less than you had originally budget for, budgeted for, that's great. You know, you save yourself some money. You're still investing in property. Fantastic. But just like Christian said, this market is really intense, so if you go over your budget, you could find yourself in a bidding war, get pushed up even further above what you thought you were going over your budget. That makes sense. It could get really messy. So just, I mean, our best advice is just don't do it. Save yourself that struggle, and once you're in your new home, you will thank yourself over and over again that you are comfortable with that monthly payment and that you made a wise investment.

Speaker 1: [14:06] This is a big reason why we say get your budget figured out before you get emotionally invested in a specific house or a specific price range.

Speaker 2: [14:16] That's- I think it's really the best advice we could give. Yeah.

Speaker 1: [14:18] Exactly. Yeah.

Speaker 4: [14:19] Now, another point that I think people often miss is one of the biggest benefits of homeownership, which is the increased leverage you have when you purchase a home. So for example, let's say you're buying a $500,000 home and you put 10% down, which is $50,000. If you didn't buy the home, that $50,000, let's say, was invested in the stock market. And just for the sake of this conversation, 12 months later, the stock market and the real estate market appreciated by 10%. Okay? They grew by t- the same rate, which usually isn't the case. Actually, h- houses perform slightly worse by a few percentage points compared to the generalized market or stock market, I should say. But just for the sake of argument, 10% appreciation in both asset classes year over year. So if you had bought a $500,000 home and put your $50,000 into the down payment for that home, you would have grown your asset by $50,000 because the $500,000 home would have appreciated 10%, which is doubling- Doubling your money doubling- Doubling

Speaker 1: [15:24] your money.

Speaker 4: [15:24] Woo … double, yeah, doubling the down payment you put in in a year. Now, if you had kept that down payment in the stock market and it appreciated 10%, you would have had $5,000 growth instead of 50,000. So just something to keep in mind. Now, it's not apples to apples here. It's a, a lot easier to get money out of stocks, generally speaking, as opposed to a home. Um, but that increased leverage can be huge, huge, orders of magnitude larger. So just something to keep in mind.

Speaker 1: [15:54] That is a really, really good point, Jason. That's a huge plus in real estate. Something else that we didn't really talk about, and I'm not gonna go deep into it, but the tax incentives that you get when you own real estate are also amazing. Like when we were talking about comparing your current rent to your monthly mortgage payment, they're not really apples to apples because you actually get to write off things like your mortgage interest. And if you have private mortgage insurance, currently based on the tax code, you can write those things off and you get a nice little check at the end of the year. It's really not an apples to apples comparison. This is where working with a really good lender that is willing to educate you and not just, you know, run your stuff through a algorithm and then spit out a little pre-approval. And that's, that's what's important.

Speaker 2: [16:39] Who should I ask, Christian, if I wanna find a lender like that?

Speaker 1: [16:42] You know, we have some good referrals for that, so just reach out to us. We have people that like to teach and, and think the same way as us. Most lenders really do not think this way. It's really important to find someone that you're comfortable with, that you like, and that will educate you on what's going on. That's an important part of all this. I just wanna say thank you to you guys. I think this was a great episode. I hope you as the listener, if you are a first-time home buyer, or maybe you didn't follow these steps the first time around, you wish you would, and now you're ready to move on to that second or third home, reach out to us if you wanna chat. We do not charge you anything to talk. In fact, if you're buying, we don't cost you anything at all. It is the seller that pays our commission. So we are free for you if you would like to chat. That's it for this week's Awesome in Seattle podcast. If you have any questions, feel free to reach out. You can always schedule a time to chat with us at awesomeinossum.com/schedule. That's it for now. We'll see you next time.

Speaker 2: [17:39] Bye everyone.