Let’s be honest – affording a home isn’t always easy. In this market where homes are selling like hot potatoes, it might seem like everyone can afford to buy a house, but that’s not true. It takes time, money, energy, planning, money and more money to become a first-time homebuyer.
Even with today’s low interest rates, affording a home can be a challenge. And it doesn’t help that we’re living in a seller’s market where prices keep going up. So, what are you supposed to do? Give up the American dream of having a three-bedroom house with a white picket fence? Absolutely not.
While affording to buy a house it’s tough, it’s not impossible. Here’s a step-by-step guide to help you land the keys to your first home:
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Step 1: Know Your Credit Score
What’s your credit score? If it’s been a while since you last checked, you should take a look at your credit report. Your score will determine your financing options for buying a house. For instance, whether or not you get approved for a mortgage is based on your credit score.
According to Equifax, a good credit score is between 739 to 670. A decent credit score is between 669 and 580. A bad credit score is anything under 579. If you have poor credit, it’s less likely a lender will approve you for a loan. And if they do, it’ll most likely come with a high interest rate.
The good news is, you can raise your credit score by paying down debt and making your payments on time. It’s also a good idea to work with a financial advisor to help improve your score.
Step 2: Look At Different Loan Options
While being a first-time homebuyer can be scary, it has its perks. First-time homebuyers have mortgage options available that don’t require a high down payment. For example, if you have a minimum score of 580, you could be approved to put down as little as 3.5% with an FHA loan.
There are many programs available to homebuyers, so make sure you’re doing your research to find the best option for you.
Step 3: Figure Out What You Can Afford
To determine what kind of house you can afford, you need to analyze your debt-to-income ratio (DTI). Your DTI shows how much money you put towards debt each month, and it’s relatively simple to calculate.
First, figure out our total monthly debts. How much money do you put towards student loans, credit card bills, personal loans, etc. each month? Once you have that number, divide it by your gross household income – that’ll give you your DTI. With that percentage, you can see just how much wiggle room you have in a month for a mortgage payment (and all the other payments that go into owning a house)
DTI is something lenders also look at when approving you for a loan. The lower your DTI, the better your chance of getting approved.
Step 4: Save Money (And Then Keep Saving)
One of the most important, yet difficult, parts for first-time homebuyers is saving enough money. Regardless of the type of home, or loan, you’ll have to pay a myriad of expenses to get the keys to your dream house. From the down payment to closing fees, it’s important you have a good chunk of change set aside so you can afford these costs.
The truth is, saving money takes time. But once you know how much house you can afford, and the type of loan you can get approved for, you can create a goal. And then, a budget to help you achieve that goal.