How To Afford A House: Your Gameplan To Homebuying Success

Certified Mortgage Advisor
NMLS 1701021
Published 
November 15, 2019

Game plan to buy a home

Let's talk about how to afford a house and get you on a game plan to start looking at everything you need to look at now so that when you're ready to move, you'll be able to afford a house. Start working on a plan. That's going to help you live comfortably and build wealth in the future with a house.

Focus your budget and timeline

So let's go ahead and dive into the first two things that we need to focus on when you're looking at affording a house is number one is your budget and your timelines. First, let's talk about your budget.

Down payment

So we need first to consider a few things from a financial perspective before we can talk about how to afford a house. Number one, we need to talk about a down payment. You need a really realistic idea of what your down payment will look like. For most people, you're going to run into a couple of different sources saying that there are different down payments.

FHA down payment

So quick run-through. FHA all is always going to have a minimum down payment of 3.5%. So take your purchase price times 3.5%. So if it's a hundred thousand dollar house, it's $3,500.

Conventional down payment

Conventional is either going to have a minimum down payment of 3% for first-time home buyers or 5% if you've already been a first-time home buyer. So people who are buying a second home or own a home right now, and you're gonna purchase another one. Your minimum is going to be 5% unless you qualify under some income limits, which at this point, most people don't so a good rule of thumb is 5% on conventional.

VA down payment

If you're not a first-time. If you are a veteran, then you're going to go with a 0% down payment. Especially when you move here into 2020, there's going to be no max loan limit. So it's going to be a 0% down payment for all veterans.

USDA down payment

And then if you're looking at buying in a rural area, you might be able to qualify for USDA. It's a pretty tight box for those loans, but that would be 0%. So what do you need to expect here? Usually either going to be 3.5% or 5% down, unless you qualify for one of the special programs that go to 0%. So look at one of those two options. They're also on top of your down payment, you need to factor in closing costs.

Closing cost

Closing costs are normally going to be about 300. The purchase price. So closing costs can get paid for by the seller. You can negotiate that with your realtor, but make sure that you have those into consideration. So don't just factor in your down payment for buying a hundred thousand dollar house you might want to have. Let's say you're going with an FHA loan of 3,500 for your down payment, and maybe you want to have a $5,000 total, so you have a little bit of extra for closing costs or any costs.

Reserves

Also, you want reserves. Reserves are what is left over after closing. You don't want to completely wipe out your bank account when you're going to purchase a home. And the reason why is because you're going to run into unexpected expenses. You could purchase the home and all of a sudden, there's something that you need to fix, or you need to paint, or you need to repair. You need to fix the door locks, you need it. You need to change the door locks. You need to fix a broken window. You need to buy furniture. You need to buy new plates, things like this happen, and you need to be ready for them.

So make sure you have some money left over there. So already we can already see the question of how to afford house factors in a lot of, do we have liquid cash ready and available to be able to go forward with this purchase.

Monthly payment

Also, the monthly payment is huge. Go with what's comfortable for you. A lot of people come to me and they say, what's the max that I can do. And I think that's a really bad question. I think it's fun to see what we can afford.

Focus on your comfort level

It's fun to see how much a bank is willing to lend to us but focus on your comfort level. Nobody who's built wealth with real estate focuses on how much debt can I take on. They focus on what's comfortable for me and the lifestyle that I'm living in, the lifestyle that I want to create.

Also, look at the current debt that you have. Would it be smarter if you took, instead of all of this money up here and putting it towards a house, what if you took this money and paid off the debt? What would that look like for you? How much could you save per month?

Focus on payment

What a lot of people don't consider is if you focus on paying down debt aggressive, Look at how much you're going to save per month and what you might save in interest, and that's going to help you build up your savings for buying a house so much quicker.

Paying off debt

If you can pay off debt and save $500 a month that you were paying on those debt payments will now be over. Even a period of four months, you're going to have two grand saved up and you can see how quickly you're going to have this snowball effect of having more money saved up to either pay down more. Or put a larger down payment on a house or continue paying off your mortgage once you have a house.

Have an emergency fund

Also, make sure that you have an emergency fund again, you don't want to purchase and drain your bank account. A good rule of thumb is to start off with a thousand dollars in an emergency fund. If you have a family, you might want to bump that up to maybe about $3,000 in an emergency fund.

So this is a rainy day fund. If something happens, you don't have to go into debt. Once you're at that range, you might want to look at doing a three to six-month fund that is going to put you on a good pace. These are things that you need to consider with your budget.

Don't struggle just to keep up

Overall, the main theme that you need to focus on with your budget is comfort level. Make sure that you're comfortable now, but also working towards being comfortable in the future. You don't need to take on a huge house payment. You don't need to have a huge house to keep up with everybody else. Make sure that you're focusing on the long-term strategy for what's going to be comfortable now and in the future for you and your family.

Time line

Now let's talk about the timeline. So your budget should help you figure out, are you on track? Are you considering everything that needs to go in with the purchase of a home? So it's going to give you an idea of the timeline from a finance perspective. But another thing, some other things we need to hit on with the timeline is a high-interest debt paid off, right?

There are people in the Dave Ramsey camp, and I love Dave Ramsey who we'll say you have to have zero debt before you purchase a home. I don't think you have to go that dramatic with it because sometimes you're just ready to move into a house or the renting situation where you live might not be suitable for you and your family. And maybe some of the dogs that you have.

High-interest debt should be paid off

But make sure that your high-interest debt is paid off. If you have $5,000 on a credit card, you absolutely want to get that taken care of before you move into your home. But if you have an auto loan at a lower rate or student loan, Continue working on paying those down, but I think you're okay to move forward with the purchase of a house while still having some of that lower interest debt.

Future expenses, future plans

Also, do you have any future expenses? Do you know that there are big expenses coming up in your life? For instance, do you have a 17-year-old kid? And that's looking to go to college here soon. Are there expenses that are going to come up in the future? Make sure that's included in your timeline. Maybe you need to work through some of those big milestones first. And then on the other side, look at purchasing.

Employment or pay change

Also will employment or pay change. This is huge. Pay is a big factor in your qualifying for your loan. Is that going to change here in the future? If you expect a raise, go ahead and get that. Try to secure it for a couple of months and then look at applying for a mortgage so you can qualify for more there.

Affording one-time cost with your current budget

Also, can you afford those one-time costs with your current budget? Again, if you made your down payment, and your closing costs, do you have an emergency fund? Do you have those reserves ready?

Can you do that with your current budget or by your realistic estimate? Is that going to put you in some hardship and make it uncomfortable for you to live the way that you're living? If so, there might need to be adjustments to how you're living right now or your timeline you might just have to expand it a little bit more.

Options if your planning to purchase in the future

So what are some options that we can have if maybe you're saying right now is not the point of purchasing for you right now. You're just saying, how can I afford it right now? I feel like I can't, I want to in the future, but how do I get there? You have some options and the theme around some options is having boundaries with yourself and how you're spending your money here in the future.

You don't have to keep up with everybody else. Have your own plan, develop that and stick to it. Be realistic with yourself. Come up with a step-by-step plan and then execute it on your terms. That's going to make you comfortable and help you grow financially in the future. So if you're at that point where you're saying real estate is way too expensive, there's no way I can afford a down payment right now.

Step 1: Save longer

There's no way I can afford the monthly payment of the housing market that I'm in. Step number one is going to be saving for a longer period of time. Renting a lot of people will talk about throwing money away. Dave Ramsey has this great line of saying renting is actually buying patients, right?

What renting can do for you

Renting is not the worst thing in the world. Renting is not going to take all of your money and throw it out. Because even when we get a mortgage, you're going to pay a lot towards interest. Renting is going to be buying patients for you in the future. If you're renting and paying off debt, you're making smart decisions to take away things that are sucking your money away.

Getting a mortgage will not solve your problems

Getting a mortgage on top of a bunch of other debt on top of not having emergency savings build up is not going to solve your problems. Those problems aren't gonna go away by getting a mortgage by getting a house that's going to create more problems that you might not be ready for because you don't want to have this debt and not a lot of money in the bank and then get a house and then have issues with it or need to buy furniture or fix up the yard and then gets you into more headache and money trouble with that house.

So you might just need to extend your timeline a little bit, and you're going to have to get comfortable with that. On a more soul and emotional level of saying, right now might not work for us, but we have a plan for where we're going to go in the next two or three, 10 years. We have a plan set aside for what's going to be comfortable for us.

Step 2: Reset expectations

It's all about stepping stones. So, one of the first things I ask people is when they're looking to buy a house, how long do you think you're going to be in this property? And 90% of the time people say this is their forever home, and  90% of the time, that is not true.

Expect life changes

You don't have to be ambitious with the first property that you buy, or even the second or third property that you buy to be your forever home. You're most likely not going to find a forever home. You're going to continually find changes in your life and things that were unexpected.

Think about yourself for the three years. How different were you, how different was your life three years ago? And so it's impossible now to anticipate with three years in the future is going to look like.

You first home could be your stepping stone

So what I tell people is to focus on these stepping stones, it's all like a ladder building up, and this works financially too. So if in your market homes are $600,000 and you're saying there's no way I can afford a $600,000 house. It's perfectly fine. A lot of people are there. So what you might do is you might say I'm going to purchase a hundred thousand dollar house. And as you're building equity in that property and appreciation, maybe you're able to sell it and take some of that equity and put it into maybe a $200,000 house and the same thing. You're building equity and appreciation. Maybe in the next couple of years, then you're able to get up to that $600,000 house.

How to gain equity?

Real estate is going to help you gain some equity in the property if you're paying down the mortgage and appreciation as real estate appreciates. You're going to collect some of that money and that's money that you can now take and put into the equity of a new house into the down payment. So you can afford something if you want to do that.

Step 3: Broaden your search

Also, broaden your search. So consider commute and train trade-offs. If you're in a high-expense area, it might be really difficult for you to have a short commute time and afford the property around there. You might have to start looking at what would it look like to expand your commute a little bit and are the trade-offs of living closer to the city actually worth it.

Consider the trade offs

I have a friend of mine who bought a house. In a downtown part of the area, they spent triple the amount that they would have if they had a 15-minute commute and they never actually participated in downtown life, they would always stay home. They didn't want to go out and do anything. And so they're paying triple for the opportunity, but not actually taking advantage of that at all where they could have done is just driven, lived 15 minutes outside the city. Almost the same amount of access if they wanted to, and they would have saved a lot more.

So consider those trade-offs obviously getting into a 40-minute plus commute is going to be really stressful, but consider what would it look like if you expanded your search into some areas that you might not have thought of before resetting some of those expectations.

Step 4: Build your team

Then finally, you're going to want to build your team. Do you want a realtor and a mortgage advisor? I would go ahead and just entertain some discussions right now, even if you're not ready. It really helpful mortgage advisor and a really helpful realtor are going to get you on track. The mortgage advisor is going to help give you a preliminary review of your finances and your credit. That way they can give you some tips on what you need to do to move forward.

What we'll do as well as we do a total cost analysis. And so basically we'll lay out all of the numbers up front for people. So they get a really solid idea of what they're working towards and a really solid a realtor. Even if you're not looking at purchasing now, they're going to give you some great insight into the market. What do they expect the market to do here in the future? And give you some pointers on showing you, Hey, you're not ready to buy a $200,000 house yet, but here's what some $200,000 houses look like. That way you can find if that price range is fitting in with your expectations.

So overall affording a house is going to take patience. Take a good view of where you're at, create a plan and then execute it to get it to where you want to go.

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