The price of a house can be intimidating, especially to first-time homebuyers.
The national median listing price set a record of $310,000 in April, according to Realtor.com. At the same time, most first-time buyers are searching for a home priced at $150,000 or less, according to a recent survey from LendingTree.
That kind of discrepancy could chase many would-be homebuyers back to the rental market, scared there's no way they can buy a home.
But there are many factors in your control that can help you afford a home purchase. Some may require advanced preparation, such as saving and improving your creditworthiness.
Find a down payment
The more you contribute to the purchase of your home, the smaller your monthly mortgage payment will be. If you’re able to cough up 20% of the purchase price, you’ll also avoid private mortgage insurance that can add to the monthly cost.
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Before you start your house hunt, add up what you have for a down payment, including a job bonus, your tax refund, savings and gifts from family. If you don’t have a lot – or even anything – for a down payment, all is not lost. Some home buyers can qualify for no- or low down payment options from the Veterans Administration, Agriculture Department and more.
Reduce your DTI
Another key factor to qualify for a mortgage – and afford your home – is the debt-to-income ratio, or DTI. Lenders add up your monthly debt payments including your future mortgage payment and calculate how much that makes up of your monthly gross income.
The higher the ratio, the riskier the borrower. If your DTI is too high, you might not qualify at all. Every lender sets its own DTI requirement. If your DTI is getting close to the edge, you need to reduce your monthly debt obligations. Refinance car loans and consolidate other debts to lower monthly payments.
Raise your FICO score
Before shopping for a home, it pays to work on improving your credit score before the big purchase. Why? Because it translates into savings.
First, lenders give lower mortgage rates to borrowers with higher credit scores. That means you’ll pay less interest over the life of the loan and your monthly payment will be smaller.
For instance, if you have a credit score of 760 or higher, you qualify for a 3.86% rate on a $216,000 30-year, fixed-rate mortgage, according to FICO. That’s a $1,014 mortgage payment. But if your score is 650, then your rate goes up to 4.9% with a monthly payment of $1,147.
“Everyone is going after house that’s move-in ready, but if you take the house that’s not as desirable and put the time and work in, you’re more likely to win that bid.”
Explore all loans
Don’t fixate on a specific mortgage loan program. Instead, find out all the options available to you from a professional mortgage professional before you even start your search. In fact, it might not be a bad idea to know you qualify for more than one mortgage as you shop around, says Sheldon.
Adjust expectations
The home you can afford may not be one that checks all the boxes, especially if you’re a first-time buyer in a market with limited entry-level homes. It’s smart to prioritize your absolute must-haves from your would-like-to-haves.
Other quick tips
Interest rate: Another way to lower your mortgage rate – and reduce your monthly payment – is to buy down the rate, says Pava Leyrer, COO of Northern Mortgage in Michigan. You can do a permanent buydown, where the lower interest rate lasts the life of the loan.
Or, you can do a temporary buydown where the lower rates lasts a couple of years. Both require upfront payments at closing. In some cases, the seller will pay for the buydown as a concession.
PMI: You can also eliminate the monthly PMI premium by prepaying the mortgage insurance upfront. The prepayment can be financed into the loan, but results in a lower monthly payment than one with monthly PMI.
Insurance and taxes: What you pay in taxes and insurance can differ by zip code and county, so a house one street over may make a big difference to your monthly payment. Compare insurance rates online and local property taxes. When budgeting, bet that these costs will go up in the future, says Leyrer.
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