Affordable Home Buying
Getting Your Finances in Order
Here are some practical ways to get ready for investing in a house purchase.
- Develop a household budget.
Instead of creating a budget of what you’d like to spend, use receipts to create a budget that reflects your actual spending habits over the last several months. This approach will factor in unexpected expenses, such as car repairs, as well as predictable costs such as rent, utility bills, and groceries. Use a basic budget worksheet to help you record the figures.
- Reduce your debt.
Lenders generally look for a total debt load of no more than 36 percent of income. This figure includes your mortgage, which typically ranges between 25 and 28 percent of your net household income. So you need to get monthly payments on the rest of your installment debt—car loans, student loans, and revolving balances on credit cards—down to between 8 and 10 percent of your net monthly income.
- Look for ways to save.
You probably know how much you spend on rent and utilities, but little expenses add up, too. Try writing down everything you spend for one month. You’ll probably spot some great ways to save, whether it’s cutting out that morning trip to Starbucks or eating dinner at home more often.
- Increase your income.
Now’s the time to ask for a raise! If that’s not an option, you may want to consider taking on a second job to get your income at a level high enough to qualify for the home you want.
- Save for a down payment.
Designate a certain amount of money each month to put away in your savings account. Although it’s possible to get a mortgage with only 5 percent down, or even less, you can usually get a better rate if you put down a larger percentage of the total purchase. Aim for a 20 percent down payment.
- Keep your job.
While you don’t need to be in the same job forever to qualify for a home loan, having a job for less than two years may mean you have to pay a higher interest rate.
- Establish a good credit history.
Get a credit card and make payments by the due date. Do the same for all your other bills, too. Pay off the entire balance promptly. Here are some more ways to improve your credit.
Creative Ways to Afford a Home
Once your finances are in order, consider these various ways to make a home more affordable.
- Investigate local, state, and national down payment assistance programs.
These programs give qualified applicants loans or grants to cover all or part of your required down payment. National programs include the Nehemiah program and the American Dream Down Payment Fund from the Department of Housing and Urban Development.
- Explore seller financing.
In some cases, sellers may be willing to finance all or part of the purchase price of the home and let you repay them gradually, just as you would do with a mortgage.
- Consider a shared-appreciation or shared-equity arrangement.
Under this arrangement, your family, friends, or even a third-party may buy a portion of the home and share in any appreciation when the home is sold. The owner/occupant usually pays the mortgage, property taxes, and maintenance costs, but all the investors’ names are usually on the mortgage. Companies are available that can help you find such an investor, if your family can’t participate.
- Ask your family for help.
Perhaps a family member will loan you money for the down payment or act as a co-signer for the mortgage. Lenders often like to have a co-signer if you have little credit history.
- Lease with the option to buy.
Renting the home for a year or more will give you the chance to save more toward your down payment. And in many cases, owners will apply some of the rental amount toward the purchase price. You usually have to pay a small, nonrefundable option fee to the owner.
- Consider a short-term second mortgage.
If you can qualify for a short-term second mortgage, this would give you money to make a larger down payment. This may be possible if you’re in good financial standing, with a strong income and little other debt.
Tips for Buying in a Tight Market
Increase your chances of getting your dream house in a competitive housing market, and lower your chances of losing out to another buyer.
- Get pre-qualified or pre-approved for a mortgage.
You’ll be able to make a firm commitment to buy and your offer will be more desirable to the seller.
- Stay in close contact with your real estate agent to find out about the newest listings.
Be ready to see a house as soon as it goes on the market. If it’s a great home, it will go fast.
- Scout out new listings yourself.
Look at real estate websites, browse your local newspaper’s real estate section, and drive through the neighborhood to spot For Sale signs. If you see a home you like, write down the address and the name of the listing agent. Your real estate agent will schedule a showing.
- Be ready to make a decision.
Spend a lot of time in advance deciding what you must have in a home so you won’t be unsure when you have the chance to make an offer.
- Bid competitively.
You may not want to start out offering the absolute highest price you can afford, but don’t go too low to get a deal. In a tight market, you’ll lose out.
- Keep contingencies to a minimum.
Restrictions such as needing to sell your home before you move or wanting to delay the closing until a certain date can make your offer unappealing. In a tight market, you’ll probably be able to sell your house rapidly. Or talk to your lender about getting a bridge loan to cover both mortgages for a short period.
- Don’t get caught in a buying frenzy.
Just because there’s competition doesn’t mean you should just buy it. And even though you want to make your offer attractive, don’t neglect inspections that help ensure that your house is sound.
Reprinted from REALTOR® magazine with permission of the NATIONAL ASSOCIATION OF REALTORS®. Copyright 2008. All rights reserved.