Is buying a house part of your dream life?
These are the steps you need to take now:
Step 1: SAVE. SAVE. SAVE. You need to start saving and that money needs to go into a high yield savings account so you are earning interest.
How much do you need to save?
Between 3-20% of the purchase price, plus between 1-3% for closing costs. Closing costs cover what you will be charged to make your purchase possible (all the paperwork, loan, transfer of ownership and funding the account to pay for your homeowner’s insurance & property taxes). The closing costs estimate is based on what is normal in California and might be different in your state.
There are a lot of factors that will determine what percentage you put as a down payment on your house as there are definitely pros and cons to the different down payments amounts. Know that if you put down less than 20%, your closing costs will be 3% & you will have extra fees tacked on to your monthly payment.
Lastly, if you are buying a house over $550,000, you will get something called a jumbo loan which requires you to put 20% down.
An Example: The average house in your area costs $500,000. You would need to save a minimum of $15,000 for the down payment (3% of purchase price) and $15,000 for closing costs (3% due to down payment being less than 20%) bringing your total cash needed to a minimum of $30,000 with the high being approximately $105,000.
You may want to have a bit more saved for a cushion because sometimes there are pest repairs that will need to be done plus you have the costs of moving and furnishing a new place.
This number can be a massive sticker shock for a lot of people. Remember that it can take years to save for a down payment. My husband and I bought our first home (580 sq ft) at 30 years old and our current house at 35 years old.
Step 2: Build a good credit score!
Your credit score will determine the type of loan you qualify for and the interest rate you will get on your loan. In competitive housing markets, your loan type matters as not all loans are created equal and can have a significant impact on your ability to get your purchase offer accepted. Additionally, the better your credit score, the lower your interest rate will be and therefore the lower your monthly payments.
Ergo, your credit score really matters so take the steps now to work towards Excellent.
Step 3: Lines of Credit
When applying for a loan, you need to have 3 bills or credit accounts in your name. This can be a cell phone bill, utility bill, student loan, etc. For all 3 accounts, you need to be able to show on time payments, paid the full amount due and that you have been paying on this account for a decent amount of time. These accounts help you establish a good payment history which helps with your loan approval.
When establishing lines of credit, do not go crazy and open 10 credit cards. Too many lines of credit can have a negative impact on your loan approval.
Word of Caution
When you get close to buying a house, your loan company will look at the amount of credit in your name (i.e. credit card debt & car payments). Keep these amounts as low as possible to improve your loan approval.
Almost ready to buy? Hold off on all other large credit purchases. Do not buy a car, furniture, etc on credit as it will negatively impact your loan approval.
I know it might feel like a lot. But the good news is I can help you with this process. In my Financially Empowered Bootcamp, you will learn about high yield savings accounts and which one to open, how to easily build a good credit score, how to create a savings plan and calculate how much you need to save per month to reach your goal. The best part? I am here every step of the way with weekly coaching to support you, answer all of your questions, help you with implementation and to make sure you are confident in your money moves and plan.
Are you ready to learn the money moves to make your dreams a reality? Let´s do this!
Some other thoughts:
1. Houses in urban & surrounding areas are insanely expensive. If you want to buy in a city, consider buying a condo. When you buy a condo, you only own the interior. You pay monthly homeowners fees that pay for the maintenance of the exterior of the building. Condos tend to be significantly cheaper than houses.
2. Live farther out and commute. Oftentimes you can get more house for your dollar.
3. Can you work from home? Consider moving somewhere with more affordable housing prices.
4. Buy just what you need but not more. When my husband and I bought our first house, it was 580 sqft, 1 bedroom, 1 bath. It was a small house but was exactly what we needed. The monthly mortgage payment was less than the rent we were paying in San Francisco so it financially made a ton of sense and saved us money each month while we were building home equity. We put 3.5% down. Depending on the area, your first home does not have to be your dream home.
Disclaimer: I am an educator, not your personal financial advisor. Please make sure to do your own research before moving forward with any actions discussed in this blog post.
Know that all investments involve some form of risk and there is no guarantee that you will be successful in making, saving, or investing money; nor is there any guarantee that you won’t experience any loss when investing. Always remember to make smart decisions and do your own research!
