But, even with the tightest budget, it is not an unattainable goal.
Here are five ways to become a new homeowner even without much financial flexibility.
Know How Much House You Can Afford
The first step to shopping for a home on a budget is to know what your budget is. To set a realistic price range and avoid overspending, it is important to know what your monthly income is versus your expenses.
Remember, what you qualify for and what you can afford may differ. A conservative rule of thumb suggests keeping your monthly mortgage payment, including principal, interest, taxes, and insurance below 25% of your monthly take-home pay.
In other words, if you bring home $3,000 each month, your house payment should be no more than $750.
First time home buyers should also know that your credit score determines whether you qualify for a mortgage and affects the interest rate lenders will offer. To determine the health of your own, obtain a free copy of your credit report from credit reporting sites such as Experian.
Explore Your Mortgage Options
As a first time home buyer, you should understand your loan options in order to confidently shop for the best mortgage for you. The Consumer Financial Protection Bureau recommends requesting mortgage rates from several lenders to compare costs, including interest rates and potential origination fees.
However, if you have significant debt or poor credit, resources such as FHA loans, which allow you to obtain a mortgage without some of the more stringent financial requirements associated with conventional loans, may be a good option for you.
Additionally, qualifying for a loan is not a guarantee that the loan will be funded. Authorities recommend investing in a backup lender to give you an alternate way to keep the homebuying process on schedule.
Consider a Short Sale or Fixer-Upper
Buying a short sale or fixer-upper could snag you a property at a great price. A short sale is where a lender agrees to allow a homeowner to unload a property despite being behind on mortgage payments.
In these situations, lenders want to re-sell the home quickly, so they are likely to agree to a lower price. Additionally, given that move-in ready homes are often hard to find on a budget, looking into fixer-uppers can provide a shortcut to homeownership for the first time home buyer.
There are drawbacks to buying either type of property. For example, in either scenario, you are generally purchasing a home as is. However, with the right precautions and a few home repairs, the end result is a home that is uniquely your own.
Buy in an Up-and-Coming Area
If you are on a budget, buying in the trendiest communities may not be a feasible option for you. An alternate investment decision for the first time home buyer, then, could be buying near, but not in, a hot neighborhood.
You can often save from 20% to 30% on purchase price just by venturing into the neighboring areas of large cities. Additionally, securing a property in an up-and-coming neighborhood can set you up for rewards later.
As the value of the neighborhood increases, so will your equity. Later home buyers will pay a premium price to buy in your same area.
According to The Neighbor, some of the best up-and-coming neighborhoods are Salisbury, MD, Cape Coral, FL, and Myrtle Beach, SC.
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Wait and Save
If you still need to fine tune your personal budget before becoming a homebuyer, it can be helpful to set specific goals for your finances. For example, if you aim to save $500 per month over the course of a year, you will have $6,000 to put toward your first home.
Not sure where you will come up with the extra savings? Consider making adjustments to your discretionary costs such as avoiding fast food, cutting the cable bill, and trading gym memberships for at-home workout apps.
Becoming a first time home buyer can be a big step, but it does not have to be a financially overwhelming one. Follow these tips to help you simplify the process, save some money, and close the deal.
Image Credit: ways to find a great first home by envato.com
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