Buying a house is a major financial milestone that seems to be part of the American dream. According to the National Association of Realtors (NAR), 27% homebuyers are driven simply by the desire to own their own home. Making it a reality usually requires a good deal of planning. From start to finish, there are multiple steps to getting financially prepared to buy a home. Let’s break down five important action items.
1. Ballpark your budget.
Before you start looking at properties, you’ll want to think about what you can reasonably afford. The 28/36 rule is an oft-repeated rule of thumb. The idea is to spend no more than 28% of your gross monthly income (before taxes) on household expenses. Meanwhile, your total debt shouldn’t be more than 36%.
Let’s say you and your partner earn $10,000 per month combined. Under the 28/36 rule, you’d want a mortgage payment that’s $2,800 or less. Ideally, your total monthly debt payments will be less than $3,600. Understanding the numbers can help guide you in saving an adequate down payment. (More on this in a moment.) Just keep in mind that your housing payment as a homeowner will also include taxes and insurance. Using a mortgage calculator can help you ballpark monthly mortgage payments.
2. Save your down payment.
Making a 20% down payment has long been touted as the golden rule, but let’s get real—saving that much can feel downright impossible. The typical home value in the U.S. is $337,560, according to Zillow data. A 20% down payment works out to $67,512. The good news for prospective homebuyers is that different mortgage programs make it possible to buy a home with much less. FHA loans, which are backed by the federal government, allow for down payments as low as 3.5%. The minimum down payment for some conventional loans is 3% to 5%.
The focus then turns to saving. You’ll want to save an additional 2% to 5% for closing costs, which are fees related to making your mortgage loan. Let’s say you’ve set a goal of saving $20,000 for your down payment and closing costs. That might be intimidating but breaking it down into smaller targets can help it feel more manageable. If you want to get there in three years, you’d need to sock away roughly $6,666 per year; or about $555 per month. That works out to $278 per paycheck. If you’re saving with a partner, it’s even less. The main takeaway is that small steps can add up over time.
3. Get preapproved for a mortgage.
Once you’ve got your down payment saved, you might feel ready to look at homes. The first step is to get preapproved for a mortgage. This involves connecting with a mortgage lender and providing financial information like your income, expenses, credit score and employment details. It gives them a picture of your financial health and provides reassurance that you’re capable of buying a home.
At that point, they may provide you with a preapproval letter that lays out your expected loan amount, interest rate and loan program. This really clarifies how much home you can afford. Getting preapproved doesn’t guarantee that you’ll get the loan—you’ll still have to complete a formal mortgage application—but it’s a good start.
4. Look at properties.
With your preapproval letter in hand, you’re ready to start viewing available homes. According to a 2021 NAR report, the average buyer searched for eight weeks and viewed a median of nine homes. Partnering with a reputable real estate agent can help streamline the process. The ideal person is someone who understands your local market, gets your unique needs, and has good reviews. Friends and family members may be able to recommend someone. You can also search through NAR’s database.
5. Make an offer and button up the deal.
When you’ve found a home that feels right to you, it’s time to make an offer. Your real estate agent can do this for you and also negotiate on your behalf. If the seller accepts your offer, you’ll likely want to schedule a home inspection. You’ll have to cover the bill, which averages about $340, according to HomeAdvisor.
It’s an important step that could reveal if the property has any issues. If so, you might negotiate a lower price or request that the seller make repairs before you buy. If everything looks good, your real estate agent and mortgage lender can guide you in closing your home loan.
Buying a home is a multistep process that usually takes time. If it feels like a financial burden or causes you to stretch your budget to the extreme, you might not be ready to make the leap just yet—and that’s ok. Waiting until you’re on solid financial ground may be the best way forward. You can use this time to improve your credit score and secure your down payment.
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