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Financial constraints can make owning your dream home seem like a pipe dream, but with careful planning and smart strategies, you could be a homeowner sooner than you think.
According to the U.S. Federal Reserve, 66% of American households own homes. Consider these time-tested home affordability strategies if you want to join their ranks.
1. Define Your Dream Home
What developer starts a building project without first counting the cost? Although you aren’t building yet, clarity on what your dream home would look like could motivate you to get it right.
Before you set out to build or buy now or in the future, you may want to count the financial cost of your dream home. From the square footage to location and choice of fancy fixtures, defining the nitty gritty can make owning a home an achievable goal.
2. Budget Before Anything Else
Now that you’ve counted the cost, it’s clear home ownership is more about money than desire. Using the estimated costs of your dream property, evaluate your income, expenses, and savings to determine how much you can afford to set aside toward your goal.
Many people feel impulsive about saving up quickly when budgeting for a home, but doing so may lower their quality of life. Instead of an aggressive budgeting approach, the 28/36 budgeting rule works better. The 28/36 rule states that your housing expenses shouldn’t exceed 28% of your monthly income. That way, you can pay your regular bills while saving for your dream home.
3. Separate Wants From Needs
Saving towards your dream home requires financial prudence and the needs vs. wants audit helps define essential spending from unnecessary spending. If you’re struggling with your need versus want calculations, you may want to take a break from spending. The longer you can live soundly without it, the likelier it’s only a want, not a need.
Separating needs from wants reduces your expenditures and helps you save more for your long-term goals, including paying for your dream home.
4. Automate Your Savings
Are you finished separating wants from needs? Automating your savings may help you enforce the discipline to save regardless of your feelings. Automated savings ensure you save before you spend — a crucial factor that could determine your project’s success.
There are many ways to automate your savings. You can set up a direct deposit, save from a paycheck, or use automated saving apps like Mints and Digits.
5. Increase Your Income
With more money comes more freedom to fund your dreams. Increasing your income can ease your way into acquiring your choice property. It may mean asking for a raise, trading knowledge for money, or getting a new job.
A McKinsey report claims artificial intelligence will replace 2.4 million U.S. jobs by 2030. Acquiring essential skills can attract high-paying openings now and in the future and help keep your dream alive. With an in-demand skill, you earn more and save more toward your home, regardless of changing workplace climates.
6. Rent Out Extra Space
Giving up your extra spaces for a few additional bucks is another way to rack up cash for your dream home. It’s not always pleasant to let go of a piece of your estate, but you should count it as a short-term sacrifice for a long-term gain.
You could list your room on Airbnb or rent it out as a storage space. Parking spaces are also in high demand, especially in urban areas. According to ParkMe, monthly city parking costs an average of $120. You could rack up thousands of dollars in extra income for a little parking space.
7. Lower Your Debt-To-Income Ratio
For most financial experts, your debt-to-income (DTI) ratio should not exceed 20% of your gross income. The percentile ratio should be lower if you’re trying to save for a new home, which can be daunting without financial planning.
If your DTI exceeds 20% of your income, you may want to pay off the high-interest debt on credit card balances and personal loans quickly. A lower DTI improves your chances of qualifying for a mortgage with better repayment plans.
8. Go Mortgage-Shopping
Without a silver spoon in your mouth, a top executive salary at a Fortune Five (without the hundred) company, or some huge retirement cut, affording your dream may require shopping for the right mortgage option.
When mortgage shopping, never take the first offer you receive. The excitement of qualifying for a mortgage can be overwhelming. Still, you’ll appreciate comparing rates, terms, and closing costs from multiple lenders more when you start paying on that mortgage.
9. Shared Equity Mortgage Is a Thing
A shared equity mortgage differs from other mortgages in that you get to share ownership with your lender(s) to obtain your dream house by providing a portion of the down payment while they foot the rest. However, only you, the borrower, get to occupy the property.
A shared equity mortgage is great if your dream home is an estate or an expensive property you cannot afford, considering your earnings and savings. The lender retains equity in the property throughout its lifetime. However, have a financial expert look at the papers before you opt in.
10. Negotiate Closing Costs
The fees and expenses you incur to finalize your mortgage are closing costs. You may have to pay 2% to 6% of your mortgage in closing costs. While it’s usually a single-digit percentile deduction, the price can be significant depending on the amount you’re borrowing.
Closing costs are crucial because they cover your mortgage origination fees, escrows, inspection, commission, and taxes. However, bargaining for the best deal could increase your savings by thousands of dollars. For example, a 6% closing fee on a $500,000 property is $30,0000. That’s more than half the average annual income of most American workers.
11. Choose Shorter Loan Terms
Loan repayment can hinge largely on the size of your income. For prospective homeowners with a decent income wanting to go mortgage shopping, shorter loan terms maturing within ten years is the best deal since you’ll be free of debt quicker, even though you’ll pay more interest.
Opting for a shorter loan term could significantly boost your savings on loan repayment over time. It may be harder in the first decade (considering you have less time to pay up), but that also means paying less interest in the long run.
12. Take Advantage of First-Time Homebuyer Programs
If your dream home is also your first, you may want to explore a first-time homebuyer program. A mortgage, but with more affordability and lender concession, first-time home buyer programs don’t require high credit ratings or stifling interest on housing loans.
Several first-time homebuyer programs are available. Conventional loan options, for example, only require a 3% down payment. The Down Payment Program (DPA) helps with your down payment through zero-interest loans, grants, and matching programs. Governments and non-profits also provide first-time homebuyer programs to give prospective homeowners a soft landing in their first property acquisition journey.
13. Obtain a Loan Against Your 401(K)/IRA
Your 401k is your retirement savings account. While borrowing from your 401(k) is discouraged as it may be a sign of financial recklessness, borrowing against it to land your dream home could be smart since owning a home adds to your asset class and financial worth.
According to the Internal Revenue Service, you can borrow up to $10,000 from your IRA towards a down payment without penalty. Rolling part of your 401k into your IRA (to avoid the 10% penalty fee of 401(k) borrowing) is also possible. You should only consider this option after seeking professional input from your tax advisor.
14. Borrow Against Life Insurance
Life insurance policy loans could be better alternatives to mortgage and first-time homebuyer programs (first-time homebuyer programs have stricter eligibility requirements). As a prospective homeowner with a three-year minimum of whole life insurance, you can use the cash value of yoyour insurance’s cash valueor your dream home.
The longer you’ve paid into the life insurance, the more you can draw in loan from it. The insurance package you’re on could also determine how much you can borrow. If you are considering borrowing against your life insurance, you should ping your broker about how best to do it.
15. Consider Rent-To-Own
Rent-to-own is an increasingly popular choice for homeowners and may replace mortgages. In a rent-to-own scenario, a portion of your rent goes toward purchasing your dream home as a down payment.
Depending on your agreement with the realtor (usually a standard lease agreement and the option to buy), you may ask for a down payment refund after the expiration of the lease if you’re unable to buy. Some realtors, however, make buying an obligation and may demand questionable, non-refundable fees. We recommend involving your lawyers from the start.
Housing Price Drop Likely in These 20 Cities
The volatility of the real estate market can frustrate first-time home buyers and investors alike. However, signs are leading many to believe that 2024 could bring lower prices to previously hot housing markets. If you’re looking for an opportunity to own property, these cities could be a great place to look.
- Read More: Housing Price Drop Likely In these 20 Cities
18 Ways to Save Without Sacrificing Life and Happiness
Do you want a new perspective on saving money? If you think this is another article telling you to skip your morning coffee or give up dining out, then let us tell you—it’s not! This blog post discusses 18 innovative and painless ways to save cash without sacrificing the things that make you happy. We believe that a good life isn’t about cutting back on everything you love but about making smarter decisions with what you have. So, if you’re ready to start saving without compromising your lifestyle or happiness, dive right in!
