How to Afford a House
Buying a house is supposed to be this wonderful rite of passage. But for most Millennials (this writer included), it seems nearly impossible. Between paying off student loans, falling into the cycle of rent, managing bills and car payments, it seems like we’ll never get ahead.
The good news is that if you want to own a home, you can start preparing for a down payment now. You might not be ready to afford a house today, but your dreams of becoming a homeowner are far from over.
Work on your credit score.
The better your score, the better loan you can qualify for, and the lower your monthly payment will be. You can save hundreds of dollars a month, all by having a great credit score. For reference:
- Good: 670 – 739
- Very Good: 740 – 799
- Exceptional: 800 – 850
Aim for “Very Good” at the very least. Keep up on your monthly credit statements, pay all bills on time, and try not to use a credit card unless you can quickly pay things off.
It seems silly, but you can’t own a house without buying one. Pre-approval for a loan is an important step in the process of affording a house. These days, a pre-approval letter from a lender is usually required, even before touring a house.
Pre-approval also gives you a chance to seriously reflect on your finances. You’ll need at least 2 years’ worth of tax returns, paycheck stubs, W2s, and bank statements, among other documents.
Research your loan and down payment options.
One of the biggest things that Millennial homebuyers regret is spending too much on the down payment. While it’s typically recommended by Baby Boomers to put much more down on a house, this might not be the best route for you — nor is it the only route.
FHA loans allow you to put down 10% or less — the exact number depends on your credit score. These loans are popular among first-time homebuyers, particularly when they don’t have the savings to put down one-fifth of a house. Check out our blogs on saving money when buying a home and other types of loans for more solutions!
Work out your budget.
Research homes in the area you want to live and think about not only what you like, but what you can afford. Here are some important considerations:
- Monthly Mortgage Payment: Is it just going to be you paying for a mortgage? Are you moving in with a significant other, spouse, or friend? Factor in who will be paying — and what they can afford — when budgeting for a house.
- Property Taxes: Unless you live in Hawaii, Alabama, Louisiana, or a few other lucky states, be ready to pay upwards of 2.25% in property taxes (looking at you, New Jersey).
- Little Fixes: Unlike renting, you won’t have a landlord to take care of that leaky faucet. Build up a savings account to dip into when small things occur.
- Big Fixes: Replacing the roof, updating to new appliances, landscaping the backyard — plan on setting aside at least 1% of your home’s value every year.
So many homebuyers think “I’ll start saving once I pay off my loans” or “I’ll look into pre-approval once I get a better paying job,” or even “I’ll learn about buying a house once I’m in the city where I want to live.”
Our advice is to start much sooner than you think you’re ready. Best case scenario, you end up with a house you love! Worst case scenario, life doesn’t change and you’re not a homeowner, but you’re more prepared to move in that direction. You don’t have to buy just because it becomes an option, but putting things off — especially if a good deal is in front of you now — could end up costing you more.
…but be smart!
Countless Millennials who regret buying a house tapped into their retirement savings to afford the down payment. This is rarely a smart move. If your only options for home ownership involve bad loans, bad properties, or bad financial decisions, wait on buying. Reassess what you need to do to improve your ability to afford a house — without the buyer’s remorse.
Buying a house should be exciting! RealtyHive works to make that happen. From real estate listings, time-limited events, and even options to help homebuyers get cash back, RealtyHive is the place to go when you’re ready to afford a house. Look through our listings today!