Buying a home is a big life decision and knowing the facts before you buy can be priceless. Many buyers are shocked when they see how much money they need upfront to purchase a home. According to Unison’s 2019 Home Affordability Report, it takes buyers across the country an average of around 14 years to save for a home downpayment.
“As a general rule of thumb, experts say you should not be spending more than 30% of your income on housing expenses,” says USA TODAY Housing and Economy reporter Swapna Venugopal. “Aside from the mortgage payment, this includes costs like mortgage interest, property taxes and maintenance.”
The price of an existing single-family home rose 18.4% to $334,500 in March 2021. Here are some things you can do to achieve your goal of saving for a downpayment.
Start with savings, income, good credit
Before you even start your home search, you need to look at your finances and understand where you stand with your financial obligations. A good thing, to begin with, is how much house can you afford with your current income, how much you have saved for a downpayment, the mortgage you can qualify for, and what the local real estate market is currently doing. There are other living expenses and costs that come with owning a home. You will have annual taxes and home maintenance to pay for.
“You should have secure employment, some savings set aside, and be able to secure a good mortgage with an excellent credit score,” says Omer Reiner, a licensed Realtor and President of FL Cash Home Buyers LLC in Florida.
In order to get good rates on a mortgage, you will need good credit. It is best to check your credit score by obtaining your credit report before you start your home search. The rule of thumb says a good score is around 670 – 739. It depends on the lender, but a score closer to 700 is ideal if you’re thinking about getting preapproved for a mortgage,” Venugopal says.
The down payment
The down payment is a big part of the deal when it comes to owning a home. The down payment is a percent of cash that you pay at the closing. Usually, you need to put at least 20% of the purchase price down upfront.
If a downpayment is a concern, some government-backed loans from FHA or USDA will allow as little as 3.5% down or no down payment. If you have to put less than 20% down, then you will also have to have private mortgage insurance (PMI). Most lenders require PMI which does increase your monthly expenses.
Just like anything else, lenders are in competition and want your business. When shopping for a mortgage, ask what the rate and closing costs are. You will want to get preapproved by a lender who will verify your income and credit. A seller is more prone to choose a buyer with a pre-approval than one without.
Get a quote from several lenders for a mortgage. Have your credit reviewed for the quotes. It would be a disappointment to be told you could get a certain rate and then be given a higher rate because of your credit score.
The down payment is only one part of the finances you need to bring to the table at closing. Homebuyers will have to also pay closing costs which include expenses on title insurance, attorney fees, appraisals and taxes.
A homebuyer should be prepared to pay 1% to 5% of the sale price. Remember when buying a house you should also have money set aside to cover home maintenance, repairs and upgrades.
If you are in the market for a new home, call a local Realtor who can help you through the home buying process.