Owning your dream home: A guide to buying a house you can afford
You’ve been considering it for a while—having a place of your own where you can customize features, build equity, finally lay down some roots. But if the costs associated with buying a new home are what’s holding you back, there are actually many ways you can prepare financially to be able to own the house of your dreams. Read on for our steps to buying a house that you can both love and afford.
Understanding housing finances
Before you can begin the homebuying process, it’s important to understand your price points in terms of house cost, down payment, mortgage rates, etc. Here are some things you should be keeping track of:
Know your credit score
Knowing your credit score is instrumental in understanding what kind of loan and mortgage rate you can get, and getting a good picture of your credit should be one of the first steps to buying a house. Understanding your credit will also help you know if you need to correct potential errors in your credit history. Ultimately, knowing your credit score will give you an idea of the house you’ll be able to buy.
Calculate what you can afford
Once you have an understanding of your financial health, calculate how much house you can afford according to your income, availability of funds, monthly payments, and credit. As a general rule of thumb when determining affordability, your mortgage payment should be no more than 28 percent of your gross monthly income, and your monthly expenses should be no more than 36 percent. Find easy-to-use affordability calculators on sites like NerdWallet and Zillow to get started.
Save for a down payment
One of the key steps to buying a house is making sure you have the funds available for a down payment, as this affects your mortgage and overall housing costs. Ideally, you’d want to be able to put at least 20 percent down to get the lowest rate possible and avoid having to buy mortgage insurance, and also to begin building equity in your new home. However, keep in mind that while it is the standard goal, you still have options even if you don’t have enough for a 20 percent down payment. In fact, “putting less than 20 percent down is available and more affordable than ever before,” according to our team at Shea Mortgage, “due to lower interest rates and lower mortgage insurance premiums.”
But how do you start saving for a down payment? While there is no uniform solution for everyone, and every person’s home buying experience is uniquely their own, there are some powerful reasons such as the benefits of homeownership that should have you putting more money away now to save even more later.
Of course, the direct way to save is to cut your spending down. Look at any excess that you might spend each month—eating out, shopping, vacationing—and determine what you can cut or minimize. Then, put that money aside. Everyone has different life circumstances and priorities, so what matters is what you can do in your specific situation.
At the end of it all, you also have to be patient. It can take five to seven years to save what you need for a down payment. Just remember: it will be all worthwhile in the long run, when you finally walk into that house you’ve been waiting to call your own.
Avoid being “house poor”
Experts say that your house payment should be about 25 percent of your total income, or as much as 30 percent if you have no other debts to pay off. However, when unplanned circumstances come up—losing a job, illness, family matters—you can find yourself house poor. According to Shea Homes Experts:
“’House poor’ occurs when too much of a borrower’s disposable income must be directed to pay their house payment.” Further, “Borrowers tend to think that they will be willing to make sacrifices on expenses like going out to dinner, shopping, new furniture, and even day care for children but that can change once you close on your home. Also, life happens, and unexpected expenses occur. Even when fully qualified, borrowers sometimes ask themselves if they will still be able to enjoy the quality of life they wish to have, doing the things they love to do, with their new house payment. If the answer is ‘no,’ borrowers should look to reduce their monthly mortgage obligation. This usually means saving more for down payment, finding a loan program with a lower rate, or looking at a lower priced home.”
By making sure you’re set with the financial considerations mentioned in the sections above, you can mostly guard against becoming house poor. And with that, we can now jump in to the proper and efficient steps for affording your dream home.
Steps for affording your dream house
A “dream home” is a space that embodies the perfect vision of where you want to live your life, according to your specific tastes and needs. Maybe it’s a large, sunlit kitchen to stage all of your cooking adventures, an outdoor living space for backyard family gatherings, or even a modern, openlayout situated near the bustling urban core—whatever it is, think for a moment about what brings you joy and fits your lifestyle. Got it? Now check out the following steps for affording your dream house:
Start saving. Look into interest savings accounts, borrow against a retirement account, and see where you can cut down on your current monthly spending. Try to save enough to be able to put 20 percent down on your home.
Find the best mortgage rate. As you research the options that work best for your circumstances, be sure to get your credit in order, set aside enough for a down payment and closing costs, and manage your monthly expenses. Remember, your monthly expenses should be no more than 36 percent of your pre-tax income.
Determine your location. Home prices can vary drastically based on the location, and it’s important to think about what’s important to you when determining the area you’re about to invest in. Check out our tips on how to choose the best neighborhood for you.
Stay within your budget. Determine how much house you can afford, while still being able to live comfortably enough to enjoy it. Aim to spend 25 percent of your income on housing costs to avoid becoming house poor.
Don’t count on future income. You can’t always predict the outcome of a future job or life circumstance. Base your new home budget on where you are now, giving yourself a reasonablecushion for whatever comes along.
The evolving housing market in 2019
Everyone at some point has felt the desire to have a place of their own. But what homebuyers look for in a new home has evolved over the decades, based on the housing market and generational differences.
Millennials and Buying a Home
The Millennial generation, while faced with staggering student debt and low wages, still values homeownership, but in a way that may be different than their parents’ generation. Inc. notes that, because of their tech-prowess, Millennials are more informed about their housing options than any generation before them. They care more about move-in ready homes because they don’t have the time or funds for renovations, and see their first home as a stepping stone toward their dream home. Green features, open floor plans, and upgraded kitchens and bathrooms are high on their list.
The Home Buying Habits of Gen X
On the other hand, homebuyers in Generation X are in a later stage in life, and are supporting growing families. Gen-Xers were also most affected by the economic downturn, and are therefore more conservative, looking for homes in affordable, suburban areas. Good thing they are among the top saving generations, clocking in at a whopping 92%, according to NerdWallet. They are also more likely to consider master-planned communities, where there is a variety of amenities for their family to take advantage of. Unlike most first-time buyer Millennials, Gen-Xers see their home as longer-term, and so are more selective about finding a space that will continue to suit their lifestyle changes to come.
The Future of Home Buying
2019 will see a continued rise in mortgage rates, but also a continued rise in Millennial demand, as the largest segment of that generation will reach peak first-time buyer age. And according to NerdWallet, though gradual, there is a trend in lenders loosening up their standards, making it a little bit easier for buyers to secure a home loan in 2019.
Resources for the first-time homebuyer
The decision to buy a home can be life changing, but the steps to buying a house can be complicated—that’s why we’ve created a variety of guides to the homebuying process to help you get started:
Lastly, check out our Resource Guide, designed to provide you with all the tools and info you need throughout the homebuying journey. Here’s a quick overview of some of the resources you’ll find:
From dreaming about your new home to unpacking your moving boxes, we’ll help simplify the whole experience as a first-time homebuyer.
Financing a new home can be daunting. We’re here to make the process as seamless as possible, whether it’s finding a loan or enhancing your credit.
Easily navigate the homebuying process with our glossary of all the words and phrases you might encounter along the way.
At Shea Homes®, we treat our customers like family, and want to help you in any way we can to make your journey to homeownership a memorable experience. Reach out on social if you have any further questions on the homebuying process, or if you’re ready to find your dream home, explore our new homes today.