By Sue Goodhart
ALEXANDRIA,VA-Do you imagine owning your own home someday? Perhaps you see yourself in an urban condo or maybe it’s a single-family house in the ‘burbs. Maybe you are a parent who would like to see your adult child making a purchase. Whatever your idea of homeownership is, now is the time to start planning. While you (or your child) may not be ready to buy now, there are plenty of steps you can take to turn the dream of owning a home into reality. With action now and some dedicated budgeting and saving, you can achieve your dreams of homeownership — perhaps even earlier than you think!
Step 1: Soul Search
This is the time to think long and hard about your personal finances. Ask yourself these important questions — and answer honestly:
How much can I spend monthly on rent or a mortgage?
How much upfront cash can I come up with to buy a property (down payment + closing costs)?
How much can I save per month to put towards a future purchase (in other words how many Starbucks drinks can I give up)?
Step 2: Start a Conversation with a Lender
You’ll want to have an early conversation with a mortgage lender. (If you need suggestions, I have some great ones!) You’ll want to meet with a lender so they can see if there are any financial obstacles before buying a home. For example, you may need to pay student loans down to a specific number or percent of your income. Also, your debt to income ratio may need to be improved. Similarly, you may need to improve your credit score. Addressing these things will be your number one priority. You may also have the opportunity to receive help from a parent or relative. Discussing how this might work, if it is a possibility, should be on your list of discussion topics.
You will also want to review the answers to the three questions above with your lender. They will use this info to show you your current options (if you were to buy a home today), and the outlook after a year of the new savings plan. Ask your lender to give you a purchase plan for both today and one year in the future. It’s important to note that interest rates can change and will affect your purchasing power.
Another great way to see what you need to do from a savings perspective is to show your lender a few properties you like. They will then work backwards and give you the required cash outlay and mortgage payment.
If you feel like diving a bit deeper, you can also discuss the various loan structures with your lender. For instance, examine a 3.5% down loan versus a 10% or 20% down conventional loan. This will help you
understand how much cash you will need to save. Make sure to discuss adjustable rate mortgages (ARMS’s) as this will help lower your monthly payment. While there are pros (lower monthly payment) and cons (your rate will increase after a certain time frame) first-time buyers are often great candidates for ARM’s as they often will not be staying in their home longer than 10 years. If, however, you keep the home longer (perhaps as an investment property), your rate – and payment – will increase.
Step 3: Open a New Account
Open a bank account dedicated to saving for your home purchase. Set up the account so that you can arrange automatic transfers into it each month (and do NOT link it to your current checking or savings accounts). With money directly deposited into this account each month, you’re beginning to save for your new home. Do the math to see how much you’ll have saved after six months, one year etc. Be sure to account for future income, such as a raise or bonus, as well as possible new expenses like a wedding, childcare or a new car. Determine when these variables could come into play and if the savings should increase or decrease.
Step 4: Save
Save, save, save. It’s never too early to start saving. Make a budget and stick to it. Beat it if possible. Chances are, you will need to spend more than you anticipate and the more cash you have on hand post-closing, the happier you will be. Think about how you can add as much per month as possible into your new account. For example, cut out your daily Starbucks run. If you’re spending $5 every workday on Starbucks, that’s an easy $100 per month!
Step 5: Talk to a Realtor
While you may not be ready to buy a home now, there are plenty of steps you can start taking today to make it happen. With the right lender and Realtor in your corner and a dedicated savings plan, you could be in your new home sooner than you think.
These are five easy steps you can begin today. Once you know how much you can afford you will be able to start exploring the market to see what your money will buy you in different areas. If you want to talk it out, reach out to a lender, realtor or financial advisor. Don’t wait!