8 Steps to Owning Your First Home in 2 Years
Making the transition from renter to first-time homeowner is an exciting moment, but the lead-up can be daunting. From drafting a realistic budget to finding an experienced Realtor, a home buyer's to-do list can seem never-ending. A recent study shows that entering the property market is becoming harder than ever, with only 35% of Americans under age 35 owning their own home. If you've been dreaming about buying your first home but aren't sure how to make it happen, read on! We've gathered all the must-know details and streamlined the process to help you collect the keys in two years. Keep scrolling to discover the eight steps to owning your first home.
It's time to open your Pinterest board and dream big! Create two lists: your dream home wish list and your non-negotiable list. In the first, start by writing down all the amazing features you'd love your new home to have. Once you've exhausted your dream list, grab a highlighter and mark the points that are non-negotiable. Be practical and consider aspects like pet-friendly buildings or proximity to work. These highlighted items will form the basis for your house hunt. It's important to look at these two lists and realize that compromising on expensive aspects (like that dream fireplace or walk-in wardrobe) might allow you to find a home that better meets the requirements on your non-negotiable list.
A low down payment might seem like a tantalizing option, but it comes at a cost. Down payments of less than 20% require you to pay private mortgage insurance, which guarantees that you're covered if you are unable to make the agreed repayments. It can cost up to 1.15% of your total mortgage. This mightn't seem like a lot of money, but when you consider the duration of your mortgage, it quickly adds up. Low down payments often incur a higher interest rate, which, coupled with your mortgage insurance could cost you a lot.
The 2016 Census found that the median American home costs $278,800, which would require you to save $2323 per month over two years for a 20% down payment, or $1161 per month if your goal is a 10% down payment. Be sure to realistically calculate your down-payment goal, and take that into account within your timeframe.
Yahoo finance expert and podcast host Mandi Woodruff says setting a realistic budget is key. "There’s no such thing as an ambitious budget, because a budget is all about thinking realistically about what you can afford, not what you wish you could afford," she tells MyDomaine. Follow a budget guide such as the 50-20-30 rule; then reassess in two months' time to revisit your goals.
A handy rule of thumb: "Every time you get a raise or bonus, pay yourself first. That means setting aside a part of that check for savings. Don't think of it like giving up your hard-earned money—it's still yours!" says Woodruff. She recommends using a savings app like Digit, which takes small portions of money from your bank account each week and moves it across to a savings account. Every time you make a purchase, the app rounds up that cost and puts the extra cents in your savings account so you'll barely notice. "You’d be surprised how quickly all that change adds up!" she says.
Debt might push out your deadline, but paying off any outstanding costs before you buy a home is essential. In fact, any debt you have could potentially hurt your chances of getting approved for a home loan. To find out if your debt could prevent you from buying a home, calculate your debt-to-income ratio. "Add up all your monthly debt payments and divide them by your gross monthly income (that’s pre-taxes)," says Woodruff. "The magic number when it comes to DTI is 43% — studies show it’s much harder for people with DTIs above 43% to qualify for a mortgage."
You've set your down-payment goal, addressed debt, and created a budget to suit your situation. Now it's time to bunker down and save. The key to saving like a pro? "Automate, automate, automate! If you don't have to think about saving, you’re so much more likely to actually do it," says Woodruff. "Start simple by contacting your payroll department and setting up direct deposit for your savings account. Every time you get paid, they’ll plunk the majority of your paycheck into your regular checking account and send the rest to your savings." She also recommends enlisting the help of apps such as Mint or Level Money. They'll help you streamline your budget and spending limit.
Hold yourself accountable to your budget goals. If you overspend on entertainment costs, be tough on yourself and take that extra money out of transport costs. Cutting down on Uber rides or your favorite bottle of riesling might be frustrating, but reining in your spending habits will take you one step closer to owning your first home.
IRAs provide an often overlooked benefit for first-time home buyers. You can withdraw up to $10,000 from your IRA and avoid the penalties, but it must be for home-related expenses such as your down payment. Woodruff points out that this is particularly handy for couples. "If you’re married, then each spouse can take $10K for a total of $20k to put toward a home," she says. Yes, that could be a large portion of your down payment sorted, helping you reach your two year goal. Be mindful of the fine print though. "The exemption is only for first-time homebuyers, and you have to use the funds within 120 days. So if your home deal falls through, you’ve got to act quickly to return those funds to your IRA or face a 10% penalty plus pay income taxes."
Finding the right real estate agent to buy your first home is vital. Given this is your first foray in the market, a Realtor can help guide your decisions and navigate the process. Ask friends and colleagues for recommendations and research realtors who are familiar with properties in your idea area. Don't be afraid to ask for references and speak to multiple agents before finding one you trust who understands your needs.
You're on track with saving money and have found a realtor to coach you through the process. Now to put one last financial measure in place: a backup fund. "Just because you have a new house doesn’t mean you don’t need an emergency fund. In fact, you probably need one even more," says Woodruff. Before committing to a mortgage, make sure you have a financial buffer in place. "There are all sorts of things that can go wrong with a home, including unexpected damages that require expensive repairs, not to mention all the other reasons you would want cash on hand like job loss or unexpected illness," she says. Woodruff recommends aiming for an emergency fund that could cover three to six months' worth of expenses to be safe.
Work through these eight steps and you'll be in a great place to buy your first home. Don't be afraid to revisit your deadline and budget allocation to make sure it's realistic. If you're struggling to curb spending, make sure you keep sight of your end goal by collecting interior inspiration or browsing real estate websites. Now, to plan your first home décor!
Found your dream home? Treat yourself with these first-home kitchen essentials.
Are you saving to buy your first home? Share your advice for other aspiring homeowners below.