How to Get Your Dream Home on a Real-Life Budget
Have you ever watched House Hunters and thought, ‘how the *expletive* can this couple afford such an incredible zillion-dollar listing that ticks every box on their list?’
We feel you. We know reality TV doesn’t always represent the real world, but wouldn’t it be nice if searching for your first house was as simple as choosing between three perfectly good options?
Unfortunately, the reality is a bit more complex — the first-time home-buyer’s journey is filled with confusing processes and unforeseen costs that add up fast, especially in today’s very hot real estate market. But if homeownership is part of your five-year plan, we’re here to assure you that you can make it happen!
We’ll help you understand the ins and outs to get you in the door of the house of your dreams, no matter your budget. Read on for some considerations before you buy, what you can expect from the actual purchasing process, and some bonus tips for once you’ve settled into your new place.
Considerations before you buy
- Face those finances: Before you even start looking at all those beautiful Zillow listings, spend some serious time with your finances to understand your readiness to buy and if you need additional time to get your money in order.
- Savings: When you own a home, maintenance and repair surprises are bound to pop up. A ConsumerAffairs report found that 25% of homeowners say their housing expenses pushed them to draw from their emergency savings.(1) What this tells us: it’s a good idea to have an emergency savings account with a significant sum set aside for unexpected expenses! In fact, this is a smart practice even if you’re renting.
You’ll want to have between three and six months of living expenses in your emergency fund to cover unexpected costs. If you can, you might even consider creating a separate emergency fund strictly for home expenses. If you don’t have any savings, it’s probably a good idea to postpone buying a home until you’ve accumulated enough cash reserves to cover your needs.
- Spending: Budgets are wonderful things, but only if you’re sticking to ‘em. Review the last month to see where your cash actually went. Write down everything, from utilities to entertainment, so that you have an honest assessment of exactly how much you’re spending each month.
- Credit and DTI checks: If you’re seeking a conventional loan to buy a home, you’ll want to have a credit score of 700 or above and a demonstrated history of paying your bills on time. Lower scores are accepted too, but aim for at least 620. Don’t know where you stand? You are entitled to a free copy of your credit report every year from each of the three credit bureaus.(2)
You’ll also want to know your debt-to-income (DTI) ratio. A ratio of 36% or below is preferred.(3) You can find lots of different DTI calculators online to see how you compare.
- Paint a picture of your perfect home: With your personal finances considered, what does the perfect home look like to you? Create a list of wants and needs, starting with the biggest ones: do you need a traditional single-family home, or does a condo suit your family? Do you prefer turnkey or fixer-upper?
Once you’ve decided on these factors, you can get down to the details of your future home’s features. How many bedrooms and bathrooms do you need? Which neighborhood do you want to live in? What kinds of layouts appeal to you most? With these features in mind, browse listings to get a sense of the cost of the types of homes you want. This exercise will help you determine which things on your needs list are indeed necessary, and which can be moved to the want list.
- Get pre-approved: Can you go shopping yet? Not quite. Soon, though. We promise! First you want to get an idea of how much a lender will be willing to loan you. Getting pre-approved can help you better predict this amount, and sellers will actually expect it from you. Without pre-approval, some real estate agents may be hesitant to take you on as a client, and sellers might not even consider an offer that doesn’t come with a mortgage pre-approval. So how do you do it?
By applying for a mortgage and completing the necessary paperwork. You should research and compare lenders, interest rates, and fees before moving forward. Lenders will consider the following information:
- Debt-to-income ratio
- Loan-to-value ratio
- Credit history
- FICO Score
- Employment history
After this, you’ll get a loan estimate within three business days that’ll detail whether or not the mortgage has been pre-approved.(4) It’ll also include things like the loan amount, terms, interest, and estimated closing costs. If you’re pre-approved, understand that you don’t need to borrow the entire amount. Decide how big of a space you need and the home’s total cost before deciding how big of a loan to shake on.
- Get a helping hand: Team up with a real estate agent to help you find homes that meet your list of wants and needs and fall within your budget. Once you find your dream space, your agent can help you negotiate the whole thing. They’ll help you make an offer, get a loan, and be able to explain any complexities along the way. Most real estate agents are paid on commission, meaning they’ll get a percentage of the selling price — fully worth it for their expertise throughout the process.
The home-buying process
- Home search: Whew, you made it to the actual fun part! Once you’ve met with your real estate agent to work out what you’re looking for, you get to pretend you’re on House Hunters, except now you’re armed with the knowledge of all the real work that actually goes into this.
As you browse through listings online, keep your needs in mind and allow for a little flexibility with your wants. Your feelings may change when you see a home in person. Once you do go on some tours, take notes on your likes and dislikes.
- Make an offer: Your agent will run an analysis to determine an appropriate price based on recent sales of similar homes in the neighborhood. This figure, along with factors like length of time the property has been on the market, will inform your offer price.
You may also consider adding contingencies, which basically stipulate that if a certain condition is not met, the buyer can freely break the contract. For example, an inspection contingency allows the buyer to negotiate the offer based on repairs needed, but the buyer also has the right to break the agreement if the property is more work than it’s worth.
- Good faith deposit: You might also be required to provide a good faith deposit with your offer, AKA an escrow deposit. This is paid upfront to show the seller that you’re serious about the offer. It’s typically between 1% and 3% of the total sale price.(5)
- Home inspection: We’re almost to the finish line, but don’t slack on these last steps — they’re super important! The home inspection will identify the severity of repairs and renovations needed on your new home. If significant repairs are required, you can request that the seller fix them before you close.
- Home appraisal: Lenders require an appraisal before they release funds. An appraisal will provide an estimate of how much the home is actually worth based on the inspection, comparable prices in the area, and market trends. Your lender will only disperse funds to cover the appraised value, so if the appraisal is under the purchase price, you’ll have to negotiate or pay the difference out of pocket.
- One last walkthrough: The final walkthrough usually happens a day or two before closing, once the seller has moved out. This’ll allow you to see the space in its entirety and ensure all agreed-upon repairs have been completed.
- CLOSE: We know you’ve been waiting for this. Closing is the final step in the home-buying process before you can finally call the place your own. This is the moment when you sign your final paperwork and get ready to pop some bubbly!
If this process feels like a marathon, that’s because…it is. The whole journey, from filling out your mortgage application to signing at the closing table, takes 30 to 45 days on average.(6) No one ever said finding your dream home would be easy, but boy is it worth it.
Once you settle in, the first thing you’ll want to feel is relief. No more paperwork. Your wallet is no longer being squeezed. But homeownership costs aren’t just made up of mortgage payments. You’ve got to furnish your place and pay for regular home improvements.
To lighten the load on these larger and sometimes unexpected purchases, consider paying in installments with Zip. It’s an easy way to manage your payments, and can be used on more than just physical goods. Home services can be paid for in installments too, as long as Visa is an accepted form of payment.
Keys to success
Becoming a homeowner is the definition of the American dream (cue the white picket fence), but this dream takes a lot of hard work. By taking the first steps, like taking stock of your current financial situation, you’re moving in the right direction to take control of your future in your new home sweet home.
Get started with Zip today
Zip’s editorial content is not written by a financial advisor. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.