Dreaming about owning a home but feeling like it’s out of reach? It might be more doable than you think.
Mortgage rates are no longer at the historic lows we saw in 2020, but even with the recent jump to 4.59% for a 30-year fixed-rate mortgage, they’re still relatively low. That makes homeownership a real possibility, so now is the time to start thinking about how to afford a house.
How to afford a house
Despite affordable mortgage rates, many people still struggle to buy a home. Perhaps the biggest issue is surging cost. In January 2022, the median home price reached $358,000 – up more than 15 percent from the prior year.
But this shouldn’t discourage you from house hunting. All you need is a little planning, so we asked real estate experts for their tips on how to afford a house. Here’s what they had to say.
1. Look at first-time home buyer mortgage options
First-time home buyers have mortgage options available that don’t require the 10 to 20 percent down payment of a conventional mortgage. For example, you might be eligible for:
- Federal Housing Administration (FHA) loan. FHA loans require 3.5 percent down with a minimum credit score of 580; those with credit scores between 500 and 579 can qualify with 10 percent down.
- US Department of Veterans Affairs (VA) loan. Eligibility for a VA loan is based on military service, but it requires no money down. Note that the VA has no credit score requirement, but lenders who provide the loans may.
- US Department of Agriculture (USDA) loan. USDA loans provide low interest, zero-down financing for home buyers in rural areas. The USDA asks for a 640 credit score, but that can vary by lenders.
These programs ease the requirements to qualify for a loan and help make getting a down payment more affordable to more people.
2. Lower your debt
Lenders look at your debt-to-income ratio (DTI). Your DTI is simply the amount of debt payments you make each month compared to your income. Lenders prefer a DTI ratio of less than 36 percent. Ideally, no more than 28 percent of that will go toward your mortgage. If your DTI is higher, lenders might be concerned about your ability to afford the mortgage.
You can use a DTI calculator to help you figure out where you stand right now. Then you can lower your DTI by paying down your debt. This often means tackling credit card debt and student loans. In fact, student loans that are in deferment can hurt you by increasing your debt even though you’re not required to make monthly payments.
According to David Dye of Gold View Realty, “A very loose rule of thumb in the industry is that for every $25 of monthly debt eliminated, the loan approval amount increases by $5,000.”
3. Buy what you can afford
Don’t get stuck on trying to afford your dream home. Sometimes a “right now” home is the smart way to go. This might mean choosing a smaller home or choosing a different neighborhood than you originally planned.
Many realtors call this buying a starter home. This is a way to lay down roots, make regular payments, and build equity in your home. Your equity can be your future down payment on a home that is more suited to your long-term needs.
4. Use your retirement for a down payment
If you don’t already own a home, your biggest asset is probably your retirement plan. The IRS allows home buyers to take out up to $10,000 from an IRA or 401(k) plan without the 10 percent early withdrawal penalty for those under the age of 59 ½. The funds must be used within 120 days of withdrawal to avoid the penalty, and all funds are added to your taxable income for the year.
For a Roth IRA, you can take out all contributions tax-free plus another $10,000 in earnings because you’ve already paid taxes on contributions.
You can also borrow money from your retirement plan, but it counts toward your DTI. You could also consider cashing more out, but that typically means paying taxes and a penalty (for those under 59 ½).
5. Know when to walk away
It’s easy to get emotionally attached to a home that’s either priced too high or has too many issues and will be a money trap.
David Reischer, real estate specialist at LegalAdvice.com, advises, “A home buyer needs to know the time to walk away from a property when the seller has a property that is overpriced and refuses to negotiate. It is not enough to simply fall in love with a property and throw reason out the window.”
One way to protect yourself is to ask plenty of question before buying. Asking questions helps you understand exactly what you’re getting yourself into.
6. Commission rebates
According to Property Club CEO Andrew Weinberger, “Buyer rebates are legal in 40 states, and they’re a great way to save on a home.”
He notes that you can get up to a 2 percent rebate, depending on the purchase price. That’s often enough to cover closing costs, which are typically 2 to 3 percent of the purchase price.
You can negotiate rebates with your realtor at the onset of the buying process, so you know how to handle your closing costs.
7. Consider a fixer-upper
If you’re handy and capable of making upgrades on your own, consider getting a fixer upper that is priced below other homes in the area. You may even qualify for an FHA 203(k) loan, a type of FHA loan that factors in the costs of rehabilitation into the loan so that you can afford the expenses of fixing up the house.
The amount dedicated to improvements is capped at $35,000. This strategy allows you to negotiate a price on a place that is below market value while you develop a plan to improve it and build equity in it quickly with improvements.
8. Get close to your desired location
Many people, especially those with young children, are very focused on buying a property in the right school district. This can lead to much higher home prices that might be out of your budget. Charter schools and magnet programs, however, allow you to live outside of the district.
“Looking at charter schools helps you get top-notch schools while living in a more affordable community,” Josh Stech, CEO of Sundae, a real estate marketplace, says. “If you don’t need to send your kids to public schools, on the other hand, your cost per square foot will go way down outside of top-rated school districts. Focus there.”
9. Ask for an early inheritance
If you have family members willing to help you out, Cynthia Sparagna, a California Sotheby’s realtor, says, “Ask for an inheritance early.”
Sparagna notes that the bank will likely require you to season the money by leaving it in an account for 90 days. Plus, you may need a “gift letter” stating that the money is not a loan.
This money can be used for the down payment or to pay down other debts to help you afford the home. If you know the money is coming your way eventually, see if your relatives are willing to use it to help with your down payment. Sparagna say parents and family members "realize they are helping their child invest and sometimes include themselves in the investment creating a win/win strategy to prevail in securing the property.”
10. Explore partial ownership options
There are investors who don’t want to live in your house but will pay part of the purchase price for a percentage ownership of the home. While you’re responsible for the monthly payments and maintenance of the property, the investor waits for the sale date to take their cut.
Be warned: in practice, this is a complex financial transaction. Don’t move forward unless you have a contract drawn up by an attorney to protect your interests. Local real estate investment clubs may have a pool of investors interested in this type of transaction.
11. Revise your monthly budget
Most homeowners think about a budget after they buy their home. However, with a smart budget in place before house hunting, you might be able to afford that home sooner than later.
Think about where you spend your money and look for areas where you can save. This might mean dropping your daily Starbucks and drinking homemade coffee or grabbing the free cup at work. You can drop multiple television subscriptions and pay for the one you watch most often. Look for ways to make groceries cheaper by cutting coupons and making a meal plan based on sale items.
By revising your budget, you free up more cash that you can use for the down payment or monthly mortgage payments.
12. Think multifamily property
According to Dan Beaulieu of Burlington House Buyers, this strategy involves “buying a small multifamily property, two to four units, and living in one unit and renting out the others.”
Real estate experts call this strategy “house hacking.” It virtually eliminates your monthly mortgage through the rents you collect. You can learn more about it in 8 Money-Saving Tips for First-Time Homeowners.
“As an added bonus,” Beaulieu notes, “Those two to four unit properties also qualify for FHA loans, which require a down payment of only 3.5 percent.”
A word of caution: you’ll need to use some of your income to cover maintenance expenses on those rental units. Plus, you’ll need landlord insurance on the property.
13. Set a timeline
After reviewing your finances and talking to a mortgage officer about what you need to do to qualify for a home, set a goal and a timeline to stay on track. This timeline should have specific milestones for when:
- Debts will be paid off.
- Savings will reach a certain amount.
- A monetary gift will be seasoned.
- You get prequalified for a loan.
The idea here is to see accomplishments as they happen so you build confidence and momentum that you can afford homeownership.