The dream of owning the perfect home is one that is shared among nearly 30 million Americans. But buying a home has never been as much of a large investment and, as house prices continue to rise, many first-time buyers are left wondering how they can possibly afford their dream property.
If you are among those, don’t fret! There are plenty of alternatives that can help you build enough resources to step up the property ladder. But remember these two principles: plan in advance and act fast.
Set Your Budget – and Your Priorities!
The first step to affording your dream home is to understand how much your dream home will cost you. To calculate how much you can afford, you’ll need to take a hard look at your current finances.
Some of the factors to focus on include:
Your current income
The percentage of your salary you use to repay existing debt each month (debt-to-income ratio)
How much you will need to borrow against the property’s value (loan-to-value ratio)
Your credit score
Ideally, your mortgage payment should not be more than 25-28% of your salary – this is known as the 28% rule. Make sure to account for brokerage fees and closing costs in your budget (2-5% of the property’s market value).
Don’t forget that the “dream home” is different for every buyer. So, be clear on what your priorities are and what you are happy to compromise on.
Pro tip – start building up your finances and FICO scores several months before you start looking for a house. For an income boost, consider partnering with a financial advisor, taking on a side hustle, cutting back on expenses, and working towards a promotion.
Pick the Right Mortgage and Get Pre-Approved
Once you know what to expect from your future home-buying expenditures, it’s time to focus on getting a mortgage loan. To do so, review the packages offered by various lenders and take into considerations factors like:
Type of mortgages offered – i.e.: Conventional, VA, FHA, USDA, and Jumbo loans
Different mortgage lengths – i.e.: 10-, 15-, 20-, and 30-year home loans
Lender fees – i.e.: origination fees and prepayment penalties
Above all, check what interest rates and Annual Percentage Rates you qualify for.
Once you have found a suitable match, ask to get pre-approved. A pre-approval is a written document in which the lender specifies your loan amount and rates. While it expires within 30-90 days, it is a must-have to start looking for the right home.
Build Up Your Down Payment
Thanks to today’s wide range of mortgage alternatives, you no longer need a 20% deposit to step up the property ladder. However, while a 0-3% down payment is all you need to access some home loan offers, it can make you look riskier in the eyes of the lender. In turn, this can limit your eligibility for better terms and rates.
So, once you are clear on how much you can comfortably spend on your dream home, consider building your down payment to own at least 20% of the property’s equity.
Pro tip – if you have already found your dream home and you can’t wait 7 years to build your down payment (the average time homebuyers spend saving for a house), you might consider accepting financial help from your family or friends. Today, nearly 43% of younger buyers successfully opt for this option!
Review Your Assets
If you already own a home and you are looking to upgrade, you can use your current assets towards the new purchase through financial strategies such as cash-out refinance.
When choosing this option, make sure to work with a financial advisor or mortgage broker who can help you understand the best course of action for your goals.
Check if There Are Grants Available to You
Depending on your residency and personal circumstances, you might be able to leverage government-sponsored financial assistance programs. For example, in Australia, first-time buyers can benefit from the First Home Owner Grant (FHOG).
In the US, some guaranteed loans – like the ones backed by the U.S. The Department of Veterans Affairs, the Department of Agriculture, or the Federal Housing Administration – only requires a 0-3% down payment and no Private Mortgage Insurance.
Alternatively, programs like the First-Time Home Buyer Tax Credit or the Closing Cost Assistance Programs can help you reduce the expenses associated with buying a home.
Think Long-Term: A Renovation Project Can Turn Into Your Dream Home!
If no home on the market ticks all of your boxes, why not “flip” a run-down or old house!? A redesign or renovation project can help you bring to life a custom home at a fraction of the price of buying a modern existing property.
But this is certainly a long-term project that will require regular investments of time, effort, and money. Make sure it fits your dream home expectations!