Should You Consult a Financial Advisor Before Buying a Home?

Your home might be the biggest purchase you’ll ever make. Should you get a second opinion from a financial pro before buying?

By , M.S., CFP

If you're in the market to buy a home, whether your first or tenth, you face a dizzying array of financial and other decisions—ones that could profoundly impact your life for years to come. You might reasonably be wondering whether now might be a good time to get advice from a personal finance pro.

True, you're probably already getting related advice from your real estate agent, mortgage broker, and possibly a lawyer. But they're not focused on the big financial picture. Many buyers end up jeopardizing their children's education or their own retirement by following the standard advice of mortgage brokers and real estate agents, who will tell you the maximum you can afford without taking your other life circumstances into account. In contrast, a good financial advisor will take a more comprehensive look at your situation before offering advice, as described here.

Financial Advisors Help You Consider the Right Issues

A good financial advisor will help you ask the right questions before buying a home. For example, though you might be most interested in the mortgage you qualify for, a good advisor will prompt you to ask, "How much home should I buy, given all of my short and long-term goals and objectives?"

This is the beginning of a discussion that puts your home purchase in proper perspective alongside every other financial goal competing for your limited resources. The discussion should address such questions as:

  • Will my total housing payments still allow me to save and set aside 12% to 15% of my pretax income?
  • Will I be able to put at least 10% to 20% down?
  • Will my plan work if I opt for a 15-year fixed-rate mortgage?
  • What is my contingency plan if my job or family situation changes right after buying and the home's value drops 20% or more?
  • Will I have a cash emergency fund equal to three to six months' expenses even after settling into the new home?
  • Should I put as much down as possible?
  • Am I overpaying for a particular property?

All of these are important both for present and future concerns.

Evaluating Information From the Financial Advisor

There are no perfect answers to any financial question, including home-buying questions. Instead, there's an ever-changing continuum of potential risk and reward that must be thoughtfully navigated. The advisor's job is to help you properly manage both risk and return, so as to help you arrive at solid answers within the context of your overall financial picture.

To find where a home purchase fits into your overall financial plan, advisors often use a framework that attempts to tie everything together in a cohesive and comprehensive way.

A fine example of this is an approach developed by Charles Farrell, J.D, LL.M. He recommends viewing mortgage debt, for example, in terms of how it can facilitate (or inhibit) one's transition from laborer to capitalist. Thus, mortgage debt is acceptable (you need a place to live after all) to the extent it doesn't get in the way of achieving a target savings level—specifically, the amount you need to save to stay on track toward becoming a supplier of capital.

For example, for a home buyer at age 40, Farrell recommends keeping mortgage debt at less than 1.8 times annual gross income. That might seem a tad frugal; but, based on his calculations, this will generally preserve your ability to save a recommended 12% of gross income. He nudges these figures to 1.7 and 15%, respectively, at age 45.

A financial advisor can help you balance what you want most with what you want at the moment, helping you understand how buying a home might impact other priorities later on. For example, taking on too much mortgage debt can make reaching eventual financial independence more difficult—particularly if things go wrong. Debt means leverage, and leverage means risk. Remember, leverage amplifies mistakes, so you need to approach it with caution and with your eyes wide open.

Considering that jobs can move out of state, divorces happen, and houses don't always go up in value, it might be worth your time and money to have a discussion with a financial advisor about what buying a home might mean for you both now and in the years ahead.

How to Choose the Right Financial Advisor

Currently, there's no restriction on who can use the title "financial advisor," which is why so many do. Personal bankers, stock brokers, insurance agents, mortgage brokers, and many other sales professionals often (questionably) market themselves as financial advisors. Most lack any graduate level training in finance and instead carry sales licenses arming them to distribute financial products on commission throughout their distribution channel (that's you). This arrangement is less than useless when you need advice from an actual financial professional rather than a product.

Unfortunately, the vast majority of people calling themselves "financial advisor" are anything but. Even among traditional financial advisors there's strong disagreement about what it means to be an advisor. For example, as a fee-only financial advisor, I'm leery of the term "fee-based advisor." That term sounds less salesy than "registered representative," however, it's essentially another term for sales professional as they accept fees and commissions.

As a fee-only advisor, I'm among an admittedly small minority (at least small in this country) who believe advisors should never be allowed to personally profit from their own advice through product sales. The idea is, as legal fiduciaries, it's best for advisors to invoice clients directly for advice. This maximizes transparency and dramatically reduces (but does not completely eliminate) conflicts of interest. For more information, The National Association of Personal Financial Advisors (NAPFA) is a good place to start.

Keep in mind that even though all fee-only advisors offer transparent pricing —importantly, quoted in dollar terms—fees for ongoing service might be based on account size. That means the advisor will lose revenue if, for example, the client makes a large withdrawal for a down payment on a home. For this reason, when you have a specific issue to address, it's often best to find an advisor who offers advice on an hourly or project fee basis.

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