How Buying a House Becomes an Attainable Goal for Many Americans
Buying a house is the ultimate American dream and, with some hard work, it can be done.
Why Buying a House Should Be a Goal
There are many advantages to buying a house thus making it one of the common financial goals many people share.
1. Tax Benefits
You are able to deduct both property taxes and mortgage interest from income taxes. As a new homeowner, you get these benefits even more since most of the money you are paying on the mortgage is going toward interest.
2. Price Appreciation
Houses usually go up in value over time. For example, the price of existing homes increased about 3.4% yearly from 1987 to 2009 on average. Over the 30 years of a mortgage, this is a big deal.
3. Inflation Hedge
Housing costs usually outpace the rate of inflation. While the interest rates are being kept low, inflation will soon happen and make it more expensive to make all different kinds of purchases, including homes. Housing is an asset that can protect your investment dollars in the long run.
4. Credit Builder
Payment history makes up a big part of your score. If you make your mortgage payment on time then your score should go up. As you start to reduce the balance then your score should also rise. Keep in mind that late payments will cause a negative impact to your score.
5. Equity Builder
Your equity in your home is the portion that is already paid for. If you have already put down 20% then you have 20% equity in your home. With each payment, your home equity grows more and more.
6. Borrowing Power
When you have more equity in your home then you have more borrowing power. You can borrow money with a home equity loan, home equity line of credit, or a second mortgage. This can give you funding for paying medical bills, your child’s education, or home improvements.
7. Move Up Power
Home equity not only gives you more borrowing power but it also gives you a profit when you sell your home and then put that money toward a new home. First-time homebuyers may only put down 3% but second-time buyers are more likely to put down about 22%.
8. Personal Finance Management Tool
With a fixed-rate mortgage, you know what your payments are going to be throughout the life of the loan. Knowing fixed costs each month can make it easier to plan, budget, and invest in your financial future.
9. Easy Savings Plan
When you pay your mortgage every month, you are doing a forced saving plan. If you want to add more to this savings plan then you can add more to your payments. With just an extra house payment each year, you can save money in interest and end your loan early.
Setting Goals for Buying a House
Buying a house can be an attainable goal if you set up smaller, realistic financial goals to help you reach it.
Research Properties to Establish Your Goal
With every financial plan and goal, you will first need to establish the end goal. In the case of buying a home, you should know the median home value in the area since numbers fluctuate depending on location. Knowing what properties are going for in your area will help you determine how much you will need to save for a down payment.
You should also consider thinking about what you want in a home. This is not just about bath and bed combinations. Is there a specific place that you want to live in? Do you want a dine-in kitchen or outdoor space? Think about your current place and your lifestyle to know what you want and don’t want. Then map out your wants versus your needs and what will be non-negotiable for you. Researching properties before you start officially house hunting can make it easier to know what you are looking for when you do start looking for homes so you don’t get overwhelmed with the process.
Figure Out What You Can Afford
You aren’t able to start house hunting until you know what you can afford. You can use different mortgage calculators in order to determine how much you can afford. You can also work with a lender to get prequalified if you think you could be ready to start the process.
Research Your Credit Score
Your mortgage interest rate will depend on your credit score, as well as the type of mortgage you can get and the length of time. The first step in researching your credit score is to get a copy of your credit report and then review it for any errors. Credit bureaus can be slow to make any changes if there are errors but your lender may be able to request an expedited rescoring that takes place much quicker.
If your credit score isn’t that great then you need to come up with a plan to raise it before buying a home to make the process easier. The higher your score, the lower your interest rate so it makes sense to improve it as much as possible to save money on a home. Raising a score about a hundred points in six months is a realistic goal.
Pay Down Debt
Another thing that is considered when buying a home, besides your credit score, is your debt-to-income ratio. Start to tighten your belt and get rid of as much debt as possible. Once you pay down debt on credit cards don’t close the accounts. One factor in your score is the amount of debt you have compared to available debt. If you close an account then it decreases your available debt total.
Save for a Down Payment
While the best rule of thumb is to save until you have 20% down, that doesn’t need to be your only option. There are programs that will allow you to put down as little as 3%. Your credit score will help you determine how much of a down payment you need.
Lenders look at your total assets. If you have things you never use then you may want to consider selling those items and banking the cash in order to save more for a down payment. To be able to make saving for a down payment easier, set a goal for your down payment, and then divide that by the number of months you have to save. Work to save that much each month.
Increase Your Gross Income
How much of a home you can afford is also going to depend on how much you can pay every month. Many lenders want you to keep the total of what you paying each month for your home at no more than 28% of your gross income. If your household income is about $4,000 a month before taxes then the ideal house payment would only be $1,120. In order to increase your gross income, you could aim for a higher salary level before you apply for a mortgage, get a promotion at work, work overtime, get a second job, or go from part-time to full time.
Create a Budget
Learning to live on a budget will be helpful when you are saving for a home, as well as after. Buying a home can come with a lot of extra expenses so being used to living on a budget can help you make sure that you can afford home maintenance, extra utilities, and more.
The Buying Process for a Home
The process of buying a house can be overwhelming at first but it doesn’t have to be.
1. Find a Home
When searching for a home, you want to take advantage of all the available options for finding homes that are on the market. This includes searching any online listings, using your agent, and even driving around neighborhoods you like to see what is for sale. Ask your family, friends, and contacts to help since you never know where a lead on a home can go.
Once you are seriously in the process of finding a home you want to make sure that you are working with an agent. If you are going to be on a budget then you may want to look for homes where the full potential isn’t realized yet. Even if you aren’t able to afford some of the fixes right away, you could be willing to live with these things in exchange for buying a place you can afford. If the home meets your list of things that are hard to change, such as size and location, then physical imperfections shouldn’t turn you off completely.
2. Consider Financing and Then Work to Secure It
There are a lot of financing options available, especially to first-time homebuyers. These programs offer lower down payment options and some even don’t require a down payment at all. Be sure to research all your options so you can find the best one that makes buying a house an attainable goal for you. Don’t be bound by allegiance to your current financial institutions when looking for financing.
Shop around, even if you are only going to qualify for one type of loan. You can be surprised at just how varied the fees are. For example, an FHA loan can have different fees depending on whether you are going to a mortgage banker, credit union, or local bank. The interest rates, which have a big impact on the total amount you are paying for your home, will also vary.
3. Make an Offer
Your real estate agent can help you decide the best offer for the home, along with the conditions you want to ask for. The seller then accepts or gives you a counteroffer. You can accept or continue the process of counter-offering until you decide to call it quits or reach a deal. Before you submit an offer, look at your budget and also factor in closing costs, along with any mandatory appliances and immediate repairs you need before you move in. If you are able to reach an agreement then you can put in a good faith deposit and begin escrow.
4. Have an Inspection
Even if you think the home doesn’t have any problems, it’s always a good idea to get an inspection for the quality, overall condition, and safety of the home. If the inspection reveals issues with the home that the seller didn’t disclose then you can rescind your offer, negotiate with the seller to make the repairs before you move in, or discount the price.
5. Close on the Home
If you can work out a deal and the inspection didn’t show you any specific problems then you are ready to close. It involves a lot of paperwork and hoping that nothing falls through at the last minute. You will have the home appraised, do a title search, obtain private mortgage insurance, and complete a lot of other paperwork during this time.
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Options for Buying a Home
Part of what makes the home buying process an attainable goal is how many different options there are when buying a house. While a conventional mortgage is still an option, you don’t necessarily have to go with that option if it doesn’t work for your financial plans.
Conventional Mortgage
When you choose a conventional mortgage, you will likely have stricter requirements than some other options. You will also need to choose between adjustable and fixed interest rates. Fixed interest rates stay the same throughout your entire loan so your monthly payment is going to stay the same and it makes it easier to plan your budget.
Adjustable rates will fluctuate based on current economic trends. It may give you a lower interest rate and monthly payment for the first few years but this likely won’t last. There is a risk of a higher interest rate down the road. When the rate increases, the payment can be too much for you to afford.
FHA Loan
This is the go-to for many first time home buyers and those that don’t have the best credit history. These loans are possible because the Federal Housing Administration guarantees a portion of the loans and this allows lenders to broaden their acceptance standards. You may be able to qualify for a home with only putting about 3.5% down. There are some upfront, as well as ongoing, costs with mortgage insurance premiums to protect the lender if you default.
VA Loans
For those that are service members or veterans, VA loans may not require a down payment or mortgage insurance. There are only a few requirements, such as sufficient income and lower debt, but keep in mind that lenders that offer VA loans may add some additional requirements.
USDA Loans
The U.S. Department of Agriculture also has programs to help homebuyers. You don’t have to live on a farm but you do have to live in what they consider a rural area. There are some income limitations, which vary by region, but the down payment requirements are typically very small.
Freddie Mac and Fannie Mae
These are government-sanctioned companies that will work with local lenders to give you some more appealing options when it comes to conventional loans. You may be able to still qualify for conventional home loans with just 3% down.
State First Time Homebuyer Programs
The programs listed above are on a national level but there are also plenty of state and local governments that also give assistance to homebuyers. Check locally for options to find lenders that can work for you.
Home Renovation Loan Programs
There are some programs that will allow you to get more home for your money. The Energy Efficient Mortgage program will help you extend your borrowing power if you are purchasing a home with energy savings improvements. If you qualify for a loan, you are able to add this to your regular mortgage and it won’t affect the amount of your down payment. It will allow the lender the flexibility to extend your loan limits for these improvements.
An FHA 203(k) loan is for buyers that want to buy a fixer-upper. This loan considers the value of the property after improvements and will allow you to borrow funds that are needed to complete the project and pay for these as part of your main mortgage. Other home improvement loans are available through Fannie Mae and Freddie Mac, where you can also work in the cost of home improvements into your mortgage.
We hope that you will find something that works for you! What Goalry can do for you is to offer you mortgage loan options. Down below, you can see a list of lenders who may give you a mortgage loan, based on the information you put in. Try it to see if you qualify:
Conclusion,
Buying a house can be one of the common financial goals for many people. As with many goals, it helps to break it down into smaller goals in order to reach the ultimate goal of owning a home. These smaller goals can make the buying process a much smoother journey.
Learning about how the process can go will also allow you to make the right financial decisions leading up to the sale. There are plenty of different mortgage options, all with different requirements, to make your dream of owning a home a reality.