Purchasing your first home is a major milestone. It’s easy to scroll through your favorite real estate listing sites and dream. What’s not easy is saving the cash you need to put in an offer. Before you go all-in on your home search, check out these five tips to help you afford your first place. Once you’ve made headway on these five items, you’ll be well-suited to secure your first home.
1. Start Saving for a Down Payment
To purchase your first home, you’ll need a down payment. The type of loan you get will determine how much you need to save. You could need anywhere from 3% to 20% of the purchase price for your down payment. Start by setting aside cash each month to go toward this expense.
While you’re saving for your down payment, plan for at least 3% to 5% toward closing costs and moving expenses. You may be able to negotiate closing costs into your purchase price, but don’t count on it. If you don’t end up needing it, use your extra cash for decor or to restore your savings balances.
Depending on your rate of savings, this may mean that reaching your target savings amount may be months or years away. No one’s savings journey is alike, so remember to keep focused on yours. Do the best you can to avoid the comparison trap and, remember, your journey toward homeownership is unique.
2. Make Sure Your Credit Is on Point
Most people are unable to purchase their first home outright. If you’re like most people, you’ll need to secure a mortgage loan to make your homeownership dreams come true. To do this, you’ll need to have excellent credit to qualify for a competitive loan.
Your credit score is determined by five factors — credit mix, payment history, amounts owed, credit length, and new credit. Typically, you want to aim for a score of 620 or higher to qualify for the best mortgage rates. If your score is lower than you’d like, consider working on your credit as you save for your down payment.
You can do this by rectifying any bad habits that negatively impact your score. If you’ve been denied credit in the past, you can likely get a credit builder card. This can help you boost your score. These cards can enable you to foster good payment habits reportable to the credit bureaus. Over just a few months, you could see your score increase with your good credit actions.
3. Calculate What You Can Comfortably Afford
If you’re currently paying rent and utilities, you have a general idea of what you can afford each month. However, the expenses associated with homeownership are different. Typically, your mortgage payment can be combined with an escrow account. This account is dedicated to paying your homeowners’ insurance and property taxes via your mortgage provider. Using an escrow account can streamline your budget, but the planning doesn’t end there.
You’re likely excited to leave the apartment life behind but be careful not to overspend your budget. The mortgage amount you may be approved for could be greater than what’s smart for your long-term financial picture.
Experts typically recommend that homebuyers only borrow 28% of their gross income toward their mortgage, taxes, and insurance expenses. Be sure to calculate all these expenses before you land on your target purchase price for your new home.
4. Budget for Repairs and Maintenance
It’s easy to get excited about redecorating your new home to suit your tastes. Before you start taking down walls, crunch some numbers and determine the long-range expenses associated with your future property.
If you’re purchasing a newly constructed home, you may not need to plan to replace mechanical components for a decade. Conversely, if you’re buying a fixer-upper, you may need to set aside/plan for improvements sooner.
Identify both your needs and wants for your new home. Settle on what’s essential and what’s fun among your goals. Create a list of each cost, time to execute, and potential return on investment. Once you’ve clarified and prioritized, you can allocate a monthly amount to save as well as a timeline for improvements. When you save now, you can avoid surprises and the temptation to charge repairs to a credit card.
5. Analyze Your Lifestyle and How Home Ownership Fits In
Do you have a robust dining-out budget? Or do you spend most of your weekends exploring new cities? If you dive into homeownership, you may be in for a rude awakening when it comes to your leisure time. Homeownership, while rewarding, requires quite a bit of time and money to maintain. Consider how much time and money you are willing to dedicate to your property in exchange for its benefits.
Taking care of the lawn and cleaning a potentially larger space will require an exchange of time, money, or both. Maintaining your home’s exterior and systems like HVAC requires a good amount of cash. General cleaning and organizing take time, too, and can be costly if neglected. You’ll need to make time for all of it. Make sure you’re prepared for this impending lifestyle adjustment.
While you’re adjusting your income and time toward your home, this change is not all bad. With a home, you often have more control over your space and may even have more privacy than ever before. Additionally, real estate is typically an appreciating asset that can help you build your overall financial portfolio.
Celebrate Your Major Milestone
Are you ready to pop the champagne and host your first housewarming party? Before you start celebrating, plot out your strategy toward homeownership. Your plan may require you to make sacrifices today, but keep the end goal in mind.
Are you hoping to gain more independence by owning your own place? Or are you excited to make your creative mark on your home? Perhaps you have dreams of building a real estate empire, starting with your primary residence.
Regardless of your goal, acknowledge this major milestone for your overall financial future. With a strategy toward homeownership in place, you can make measured progress toward achieving it. Before you know it, the day will come when you close on your first home. Your effort today will make all of the sacrifices and planning worth it. When you sign the final paperwork and get the keys to your own place, you’ll never look back.
