Purchasing a home is a major life accomplishment. In fact, for most of us, it’s easily the most expensive purchase we’ll ever make. The financial burden alone can make the path to homeownership pretty daunting which is just one of the reasons why the number of people in the United States with deeds in their names is at a historic low. To make matters worse, the recession certainly didn’t do anything to boost confidence levels. Increasingly, more and more families are putting off the pursuit altogether. Particularly for Millennials, choosing long term rental is an understandable yet flawed approach that’s ultimately a money waster. In most markets, it’s a far better decision to invest in a house of your own, and just because the process is intimidating doesn’t mean it’s out of reach. This is how you can get there.
Unless you’ve got a couple hundred thousand saved up inside a mattress somewhere, there’s really no way around this one. The median home price in the U.S. today is about two hundred thousand according to Zillow. For most Americans, the path to home ownership passes directly through good credit. That means having to take out home loans and worrying about things like interest rates and mortgages. Before shopping for houses, it’s the first thing you have to have sorted.
But as a nation that’s riddled with debt, most of us have less than perfect credit. That’s certainly okay if that’s true for you. It just means you have to address it before you can buy. There are plenty of ways to build up good credit, either on your own or through credit repair companies, it’s just something you have to be intentional about because it won’t get better on its own. Find out what it takes to get yours where it needs to be before you invest in a home. Remember: the better your credit, the better your loan.
The Down Payment
The down payment is going to be the most significant out of pocket expense when you purchase your home. To help you get started, come up with a realistic number to work toward that’s right for you. Though both Fannie Mae and Freddie Mac finance home loans for as low as 3% down (and it’s not unheard of to score a loan with no money down at all), that doesn’t mean you should take it right away. Make sure you shop around for loans, and don’t immediately hop on the loan that provides the financing you need. You could easily end up in trouble with monthly mortgage payments that are far too high or interest rates that make it difficult to get out of the red.
Many experts believe that 20% of the sale price is a great number to go by for the down payment. It may seem like a lot, but it saves you money in the long term by yielding far smaller monthly payments that accumulate less interest. It also shows that you have a dog in the fight, and are serious about home ownership, which can result in not having to pay for mortgage insurance. All in all, a higher down payment now leads to thousands of dollars in savings later.
Now that you have an idea of how much cash you’re going to need as a down payment, you have to set goals and figure out how to get there. Patience is key, because this could take a concentrated effort. In addition to having the down payment ready to go, you also have to worry about factors like your monthly mortgage payments, closing costs, interest rates, and other fees. You need to make sure that you’ll be set up to continue paying on your home even after you purchase it so you won’t slip further into debt. To do that, you need realistic goals.
Before you purchase a home, you need a steady source of income that ensures your total living expenditures ideally won’t be more than 33% of your monthly income. You should also be as debt free as possible before going into it. In addition, save up money for an emergency fund as a cushion in case the value of your home depreciates suddenly, or if you need to refinance. Lastly, be realistic about your goals. Work toward a starter home that’s within your means. Many first time buyers make the mistake of purchasing too much house for their needs. Better to buy small and upgrade or move to a bigger home when needed then spend more than you have to. It won’t just impact your initial costs and your mortgage, you’ll take a hit on maintenance and bills.
Saving up thousands of dollars might seem impossible, but it’s entirely doable if you budget carefully, set long term benchmarks, and put forth consistent effort. Achieving your goals will likely require two things: an increase in income and a decrease in spending. If you’re working toward getting into your starter home, that’s a good time to rally for more money from your employment. Either lock down that raise, milk the overtime, or do some moonlighting. Get your resume out there, and pursue other gigs that might pay more.
You should also do some belt tightening whenever possible. Eliminate unnecessary spending and take on changes in lifestyle if need be. Small savings here and there will add up when you’re making your budget while a large adjustment can be exactly what you need to get on the right track. Moving from a two-bedroom from a one bedroom apartment can save you 25 to 30% on rent for example. It’s just one of the many ways you can make your goal a reality.