5 Tips for Affording Your First House

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You constantly hear footsteps overhead. The hallway smells of rotting trash. And the neighbor’s dog won’t start barking. It’s beyond time to say goodbye to apartment life. But how do you afford the move from renter to homeowner?

The first step to making your dreams a reality is to crunch the numbers. To get a clear picture of what’s possible, you’ll need to review more than just your current bank account.

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1. Analyze Your Consistent Income and Financial Obligations

You know the drill — you’ve got to make money to cover your expenses. Before scrolling the real estate listings, review your reliable income sources and financial obligations. While you can adjust lifestyle choices, expenses like student loans and car payments aren’t easy to shake.

Take a look at your spending habits and current housing payment to understand what expenses are manageable for you. If you find that making your rent payment is challenging, you may not be ready to jump into your home search. Conversely, if your savings account has six months of expenses stashed in it, you should feel comfortable looking. Try to land on a monthly payment number that you can manage while allowing for both surprise expenses and fun.

2. Make Sure Your Credit Is Solid

Unless you found a bag of money in the woods, you’ll likely have to take out a mortgage. Needing a home loan means you’ll also need good credit. Review the factors that impact your score and your numerical score before you request a loan pre-approval. When was the last time you reviewed your score? If it’s been a while, it’s a good idea to pull your free credit report.

A score of 620 is generally the minimum recommended for a conventional loan. If your score could use some help, a credit builder card could be just the ticket. These cards often don’t require a credit check, so applying for one won’t ping your credit report for an inquiry. When you pay your balance each month, your on-time payments can help improve your track record with the credit bureaus.

3. Evaluate Potential Initial and Ongoing Expenses

You may be thinking that if you can cover the mortgage and utility expenses, you’re golden. Not so fast. Homeownership can be a financial drain if you don’t assess your property and taste before signing your final disclosures.

Consider the immediate fixes the house will require and negotiate their resolution into your purchase agreement. Getting the seller to upgrade mechanicals and fix safety issues is brilliant for any buyer.

Think about stylistic changes you may want to make, like paint, fixtures, and decor. If your new place is more significant than your current one, you might need to budget for new furniture. Plot out everything you want to do in the near and long term. While things like a bathroom renovation can wait, a fence to confine your dog may not. Get quotes from service pros ahead of time to ensure you have accurate data.

4. Stress-Test Your New Homeowner Budget

Once you’ve landed on your number, practice living as if you’re paying it toward your mortgage and saving for repairs. If this number is $1,300, save the difference between it and your current expenses in a separate account. Avoid touching the saved amount to stress-test your ability to live off your new potential budget. If you’re forced to dip into this account, you may have to adjust your target amount.

If you find that this number works for you, continue to practice living on this new budget, saving the difference toward your down payment. Most loans require a 3.5% to 5% down payment at a minimum, so your budgeting exercise can help build your stash. Once you purchase your property, you’ll avoid the painful transition from renter to the owner since you’ve been practicing for months.

5. Plan for Affording Your Next Home

You may be surprised at how quickly you can outgrow a house. But life events like new relationships, kids, and job changes can make you reassess your living situation. Plan your next move by considering what you may want to expand to and how you’ll get there.

Build space in your budget for a future down payment, so you have the flexibility to house search years down the road. While you may choose to sell your first place to help fund your new home, doing so is not guaranteed. You may choose to rent it out, or the housing market in your area may make selling difficult. Being ready to fund your homeownership dreams otherwise is often the best bet.

Investing in Real Estate Can Be a Financial Game-Changer

Besides providing you with a place to live, real estate can bolster your long-term financial future. Real estate can be one of the best-appreciating assets to help you build wealth.

If you decide to move on from your starter home someday, you can make your property work for you. Some people rent their first home out to tenants, allowing them to pay down the principal while retaining the asset. Others choose to sell it and roll the profits into their next home.

No matter how your plans play out, homeownership is an opportunity worth pursuing. Dedicating the time and effort to create a financial foundation for homeownership today will serve you well.