7 Steps to Affording a Home in Today’s Real Estate Market

With higher interest rates and home prices, the dream of homeownership can feel out of reach. But if you still want to buy a house or a condo, there are ways to do it, even in today’s challenging environment.

Before getting into that, let’s look at whether you should consider buying your own place.

Why Buy a House?

Buying a home is a long-term investment, allowing you to build wealth over time through appreciation and equity as you pay down your mortgage. Factors in favor of buying a home include more than building equity, however. Owning your own home can bring tax benefits, avoid potential for rent increases, and allow for customization.

Paying rent comes straight out of aftertax earnings, meaning you get no tax deductions for this monthly cost. On the other hand, the interest paid on a mortgage and property taxes can be deducted if you itemize your taxes. So, let’s say you pay rent of $2,500 a month. If you buy a house with a mortgage payment of $3,000 a month (of which 80% is interest) and pay property taxes of $500 a month, you would pay $1,000 a month more as an owner than you would as a renter. But it’s a different story if we factor in tax savings. Assuming your combined federal and state tax rate is 35%, your aftertax cost of the home would be $2,485.

Renting comes with its own set of unique issues. The landlord can raise rents, potentially turning an affordable place into an unaffordable one. You have to rely on the landlord for repairs and improvements—and if you make improvements to the property, they belong to the landlord. And you run the risk of the landlord kicking you out. Although not having the responsibilities of property ownership can be a relief, the downsides to renting can be problematic.

Owning your own home means you can hang whatever you want on the walls, paint the interior and exterior in the colors of your choosing, add a Jacuzzi, and so on. In other words, you can make your home into what you want.

Downsides of Buying

Sometimes buying is not in your best interest. It’s not for everyone.

Obviously, if you can’t afford the down payment, mortgage payments, taxes, and upkeep, it’s not the right time to buy. Unless you have eliminated credit card debt, saved enough for the down payment, and have an emergency fund of at least six months’ worth of living expenses, you shouldn’t jump into homeownership.

Because buying a home is a long-term investment, unless you plan to live there for at least five years, you should rent. Buying and selling within a few years does not give you the ability to “amortize” the one-time costs of commissions and moving expenses. Also, volatility in the real estate market could mean selling when the market is down. It just isn’t worth the risk.

Still Want to Buy? Get Prepared

You must be financially able to buy a house. This begins with having a reliable paycheck. Beyond that, you should not have accumulated credit card debt, and you should have enough cash to cover the down payment, moving costs, and an emergency fund.

To help determine what you can afford and to know you’ll actually be able to get a mortgage, get a prequalification (or preapproval) letter from a lender. The lender will review your financial situation and issue a nonbinding letter stating how much it would be willing to loan to you.

Before you start looking, know where you want to live and intend to be there at least five years. Don’t overextend yourself. Being “house poor” is no fun!

Affording a Home in Today’s Market: 7 Steps

If you now feel you are ready to take the leap into homeownership, note there are seven more steps you should take to ensure you can afford a home and not financially overextend yourself:

1. Save at Least 20% of the Purchase Price

Saving the money to purchase a home is a good goal, but how much money will you really need for a down payment? With certain loan programs, like VA or first-time homeowner loans, it might be possible to buy a home with a small down payment. Although this sounds worth pursuing, unless the interest rate is much lower than a conventional loan, it means your monthly payments will be higher. You might also have to pay an additional monthly amount for private mortgage insurance. To avoid having to pay mortgage insurance and to keep your payments lower, your goal should be to save at least 20% of the purchase price. Be creative in your savings strategies, shoot for a raise or bonus at work, and consider asking for help from your parents or other family members. Just don’t dive in until you’ve saved a chunk for the down payment, while still leaving yourself with an emergency fund.

2. Build Your Credit Score

Building a strong credit score actually translates into monetary savings. A high credit score, in addition to helping you qualify for financing, can also lower your interest rate and reduce your monthly mortgage payment. To boost your credit score, try these strategies:

• Pay your bills on time.
• Check your credit reports periodically and dispute any errors.
• Pay off debt and keep credit card balances low.
• Ask creditors for late payment forgiveness to avoid posting on your credit report.
• Avoid unnecessary credit applications.
• If you don’t have a credit history, consider starting with a secured credit card.

3. Make a Budget

There’s a need for budgeting both before and after buying a house. Living within a budget helps with saving money for the down payment. Finances change once you own your home. While you’re no longer having to save for a down payment, your monthly bills will be different. Even before signing papers, you should assess your finances. Create a realistic postpurchase budget that details income and expenses and revise it, as needed, as you become more accustomed to your situation. Try using a budgeting app.

4. Shop for Mortgages

Consider all your options when it comes to choosing a mortgage and a lender. When financing your dream home, don’t settle for the first lender you come across—or even the lender that issued your prequalification letter. Shop around and compare rates and terms from different banks, mortgage brokers, credit unions, and online lenders as well as possibly direct seller financing. Be sure to explore the possibility of qualifying for government loan programs like FHA, VA, and first-time homebuyer loans.

Adjustable-rate mortgages and interest-only mortgages can be an option, especially if you expect your income to increase in the near future. These mortgages can offer a lower initial payment compared with conventional fixed-rate amortized loans. However, at some point, the interest rate can reset, and full amortization will be required. Thus, before committing to an adjustable-rate mortgage or interest-only mortgage, be sure to truly evaluate your risk tolerance—including worst-case scenarios—and your future income projections.

5. Be Willing to Be Flexible

Finding your dream home and buying the right home are two different concepts. If you really want homeownership, being flexible can make the difference between success and failure. Consider different locations, dwelling types, sizes, need for TLC, and age. By expanding what is acceptable, you might find a more affordable home that still meets your needs. Also consider using a buyer’s real estate agent. Having a professional in your corner can help you find what you need, represent you, and ensure you are not overpaying.

6. Get Comfortable Negotiating

Don’t be afraid to negotiate the price, taking into account comparable properties. If you have an agent, they can handle this for you. If you can’t negotiate a fair price, walk away.

7. Be Patient

If you can’t make a deal for the house you want, let it go. There will be another house that’s right for you. If you find that prices or interest rates are keeping homes out of reach, give it time. Patience is key to being successful in your quest for homeownership.

Consult Experts

Buying a home will likely be your biggest purchase and contribute significantly to your financial security and life satisfaction. Because of the materiality, be sure to consult with an experienced team of professionals, including a financial advisor, CPA, and real estate agent. Careful planning and persistence can turn your dream of homeownership into reality—even in these challenging times.