How to Afford Buying a Home in the US
Buying a home is a big financial commitment. It requires a substantial amount of money upfront for the down payment and associated closing costs. Certain areas around the United States have a more competitive housing market, making the prices rise astronomically. Regardless of what you’re looking for, here’s how to afford buying a home in the U.S.
Understand Your Options
Before doing anything, you need to make sure that you understand all of your options. Knowing what you can and cannot afford is crucial to the home buying process. When you don’t analyze your budget, it makes the entire process difficult and quite frustrating. You’ll also want to talk to a few different lenders to get an idea of what their lender-required minimum down payment will be. This should be your very first step. Spend time researching to get a better understanding of your eligibility.
If you have a specific location in mind, take time to better understand what the average cost of a home is in that area and plan accordingly. Some cities in the United States are much costlier than others and if your salary isn’t high enough you may not qualify for a mortgage. Nationally, the qualifying income required to buy a home is about $55,500 with 10% down and $49,500 with 20% down. In some cities, this is much higher; in others, it’s lower. If you’re restricted to a specific city due to work, check out different suburbs and look into public transportation. Prices for homes can vary drastically from one suburb to the other, so it’s worth it to explore your options.
On average, households who recently purchased a home made about $75,000. While you may qualify to purchase a home if you make less than this, it can be difficult if you’re making significantly less. If you’re making under $40,000, it’s more feasible to rent and save so you can work towards a higher down payment.
Look into Home Buyer’s Assistance Programs
Once you have a better idea of what your options are in terms of location and budget, look into some options for home buyer’s assistance programs. There are different national and local programs that can help you qualify for a mortgage. If you’re a first-time home buyer, you may have access to down payment and closing cost assistance, special loans, reduced interest rates, and more. If you’re not a first-time buyer, check out options from the U.S. Department of Housing and Urban Development (HUD) or state and local programs. We recommend you begin your search locally. If you can’t find anything then opt for federal programs.
Alternative Loan Options
If home buyer’s assistance programs aren’t enough, consider alternative loans. There are a lot of options such as a loan backed by the Federal Housing Administration (FHA). If you’re a veteran, you may be eligible for a loan from the Department of Veterans Affairs Home Loan (VA Loans). You’d be surprised with how many buyers’ assistance programs there are, you just need to look. When you do find something, always take the time to read the fine print before signing anything. Certain loan options can come with some serious stipulations and you’ll want to weigh your options before making a commitment.
Know Your Credit Score
When buying a home, your credit score matters. It communicates risk to different lenders and can make a huge difference on your options. When you have a good credit score, it shows lenders that you’re responsible and trustworthy. The better your credit score is, the more options you’ll have for different loans. High credit scores also tend to lower your average interest rate, which can save you thousands of dollars of the years.
Your credit score is determined based off of a number of different factors including your payment history, your current level of debt, how long you’ve had your credit line open, different types of credit that you have or have used in the past, and how many inquiries you’ve made regarding new credit. If your score is lower than 580, you’ll have trouble qualifying for a home loan and a score above 720 will give you the best options. If you have a low credit score, try taking measures to improve it prior to buying a home.
Make an Effort to Save Towards a Down Payment
The process of buying a home isn’t immediate. It requires years of saving to reduce the month-to-month financial burden of a mortgage. Plus, it’s extremely rare for a lender to provide you with a loan that covers 100% of the purchase price. The higher your down payment is, the lower your monthly payments will be and the less you’ll pay in interest over time. While a 20% down payment can help you avoid PMI fees, many people are unable to reach this number. However, it’s worth it to make an effort to save as much money as possible to work towards a down payment.
Consider All of the Costs
In addition to your down payment, you’ll need to cover closing fees along with a number of other hidden costs. Plan for this ahead in advanced so that you can save an adequate amount of money. While it is possible to use your loan to cover some hidden costs, it won’t help with everything. It’s better to plan to pay many of these costs out of pocket so that you can use as much of your loan toward your home as possible. Closing costs are usually about 3% – 6% of the total cost of a home—the price varies depending on your lender and type of loan.
Make a List of Deal Breakers
Before purchasing a home, you’ll visit a number of places on the market to get a feel for what’s in your budget, what you like, and what you dislike. Before taking any tours, make a list of your absolute deal breakers—the things that you need in your home that are non-negotiable. This could include the number of bedrooms or bathrooms, the location, or the size of the yard. Write everything down and keep it on hand when you’re going on tours. You may realize that there are some things you can be more flexible about and others that you want to stand firm on. Then, be realistic about your deal breakers. If your budget is lower, are the things on your list attainable? While everyone wants to live in their dream home, it often takes years to get there.
Be Open to Compromise
With that being said, be open to compromise. If you’re willing to make a few small trade-offs, you may be able to find a home that satisfies your primary needs and deal breakers. This may include longer commute times or different neighborhoods. Be open minded to looking at options that don’t originally meet all of your boxes and you might be pleasantly surprised.
Consider a Fixer Upper
If you still can’t seem to find a home within your budget, consider buying a fixer upper. This is the ideal situation for those who have some experience with renovations or are handy by nature. Fixing up your home can be an extremely rewarding process that allows you to create exactly what you want in a more affordable way. However, renovations do require some money, so make sure that you have the funds available. The best way to keep this affordable is to find a home that’s livable so you can make the renovations slowly over time. Just make sure that when doing renovations, your work is up to code and you hire professionals for more serious work such as plumbing and electricity.
Find a Rent-to-Own
Another option is finding a home that allows you to rent-to-own. Rent-to-own leases are different based on the owners/landlord, so it’s essential that you fully understand the fine print before making the commitment. It’s also necessary to get a home inspection to avoid problems after moving in. You should fully understand what you’ll be responsible for and that you’re legally protected in different circumstances.
Find the Right Real Estate Agent
The best way to find an affordable home in the U.S. is through a reputable real estate agent. Real estate agents have access to listing that may not be visible to the public and are able to browse the market based on your budget, requirements, and deal breakers. To find a great real estate agent, contact First Star Realty today.
At First Star Realty, we’re committed to providing five-star realtor services to Northwest Arkansas. Our team of highly seasoned realtors can help you find an affordable home in your budget or sell your home when you’re ready to find something new. We’re dedicated to providing exceptional, personalized service to all of our clients. Call us today at 479-267-1600 or fill out a contact form on our website.