Do you want to get out of the rent trap and invest in a new home? According to a recent CNN poll, the majority of current renters, about 86%, say they want to buy a home but can’t afford one. Homeownership doesn’t have to be a distant dream. With the right financial moves, you can put yourself in a good position to buy your first home. Here are the steps to take that will put you on the path to homeownership.
Jumpstart Your Savings Plan
If you’re in the beginning stages of planning for homeownership, creating a savings plan is essential. You may need to think of creative ways to cut expenses like getting a roommate, taking public transit, cutting back on discretionary spending, or starting a side hustle. All of these financial moves will help jumpstart your savings and help you afford homeownership while still paying rent.
How Much Can You Afford?
If you’re serious about homeownership, getting pre-approved for a mortgage will help you better understand how much you can afford. This can help you narrow your search and create a realistic timeline for saving for a home. Next, you’ll need to calculate the total cost of owning a home so that you can make sure your timeline is appropriate for your budget.
Calculate The Total Cost of Owning a Home
Are you prepared for the upfront costs of owning a home? To prepare for homeownership, you may need a down payment of up to 20%, closing costs, and a good rule is at least 2 months of mortgage payments, including principal, interest, taxes, homeowner’s insurance & any HOA dues. These costs should be less than 28% of your gross income. It’s also a good idea to set up a sinking fund for regular home maintenance. You also will need to cover moving costs, which, even for a local move, can cost an average of $2,500. Once you calculate these costs, you can make sure that you are saving enough each month for your goal of homeownership.
Work on Your Credit Score
One of the most important factors when applying for a mortgage is your credit score. Lenders will do a deep dive into your credit history. To prepare for homeownership, it’s important to understand things that may have a negative impact on your score. If you’re getting ready for homeownership, you should avoid any new credit applications, decrease your debts, and dispute any inaccuracies on your credit report.
Understand The Best Type of Loan for You
While conventional loans may require anywhere from 5%-20% down payment, there are other options for loans. Exploring all of your options can help you on your journey to homeownership.
- FHA Loans: FHA loans require a down payment as low as 3.5%. These loans are good for buyers with less-than-perfect credit. The lower your credit score, though, the larger the down payment will be.
- VA Loans: VA loans are designed for veterans and active military members. They also require no down payment.
- USDA Loans: If you live in a rural area, a USDA loan may be an option. These loans are backed by the Department of Agriculture and also don’t require a down payment.
- First-Time Homebuyer Assistance: Some cities and counties offer down payment assistance and low-interest loans for first-time home buyers, along with closing cost assistance. Grants may also be available if you meet certain benchmarks.
Preparing for Homeownership
It may seem challenging to rent and still prepare for homeownership, but it’s not impossible. With the right financial moves and knowledge, your dream of owning a home can become a reality. Are you saving for a house? What are your biggest challenges?
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