Is one of your New Year’s goals for 2023 to buy a home? While that may feel like a daunting task at first, if you break it up into smaller goals it will slowly begin to feel much more manageable. As an added benefit, hitting these smaller goals will also help set you up to better qualify for a mortgage.
Goal #1 Get your Debt in Check
The overall amount of debt you have will affect your home-buying journey. The more debt you have the less home you can qualify for. Your Debt-to-income ratio ultimately determines how much of a monthly payment you qualify for. To see how monthly debt obligations affect your purchasing power below is an example.
Let’s say the maximum debt-to-income ratio is 40% (you can go higher but it depends on various factors). We have buyer #1 and buyer #2 who both make $10,000 per month. For both buyers, their housing expenses and other debts can not exceed $4,000 per month.
Buyer #1 has a credit card they use for day-to-day expenses with a minimum monthly payment of $25. This means they can qualify for a maximum housing payment of $3,975 per month.
Buyer #2 has a $500 monthly car payment, credit card debt with a minimum monthly payment of $100, and a $250 monthly student loan debt payment. This means they can qualify for a maximum housing payment of $3,150.
While you might be thinking that is not a large monthly payment difference it has a dramatic impact on your overall purchasing power. Assuming both buyers are looking at a 30-year fixed mortgage at 6.50% with a 20% down payment, buyer #1 would be looking at a purchase price of approximately $670,000 whereas buyer #2 would be looking at a purchase price of about $525,000.
Another reason to get your debt load in check is that it can help improve your credit score. Paying off balances or keeping your balances low compared to your credit limits will show financial discipline and inherently boost your credit scores. If you are unable to reduce your balances, at least ensure you make all your payments on time. Credit scores like to go down quickly but take a lot of time and effort to come back up.
Goal #2 Save. Save. Save.
It is a well-known fact that you need to save money if you want to buy a home. A slightly lesser-known fact is that many great low-down payment options will allow you to buy a home with as little as 3% – 5% down. Make this percentage your first savings goal rather than the daunting 20% down most people talk about. Open a separate bank account specifically to save for a down payment. Start small and you will be surprised how quickly those small wins start to pile up. Below is a great example.
Let’s say you eat out for lunch every day and that it costs you $10 more than bringing lunch from home would. That’s $50/week, $200/month, or $2,400/year. Let’s say you also head down the street from your office every Friday for a beer. Let’s call that $20 since we know you are not just ordering one beer. That adds up to another $80/month or $960/year. Let’s also say you go out every weekend and spend an average of $100 doing so. Cut this luxury to every other weekend and that’s an extra $200/month or $2,400/year. Finally, let’s say you decided to upgrade your car. Instead, save that additional $300/month in payments for an extra $3,600/year.
Between just those four things you are looking at $9,360 in one year. That is a 3% down payment on a $312,000 home which just goes to show how small decisions you make every day can help save money in the long term. These small savings will add up before you know it and you can enjoy lunch or a beer at your new home instead of going out in your fancy new car.
Goal #3 Consider a Starter Home
Everybody wants the dream home with a huge backyard and views of the beach. The internet allows us to scroll through homes every day which we dream of buying. In reality, tempering expectations and starting with something a bit smaller such as a townhome or condo can be beneficial. Rather than waiting until you can afford to purchase your forever home, consider buying a home that you will be happy living in for you for the next 3-5 years. Remember, you can always choose to upgrade in the future. By purchasing a starter home now you will start building equity, lock in a monthly payment, and learn all you need to know about the home buying/owning process before taking on a much more expensive home.
Have questions about what you qualify for or steps you can take to better qualify, give us a call. We are here to help. We wish you all a Happy New Year and a prosperous 2023!