Panic struck early one morning when my eyes flew open and my brain immediately clung to one crystal-clear thought: I’ll never be able to buy a house.
Hours before my boyfriend and I had been creating timelines and action items for our big audacious financial goals. We were excited and hopeful and all of the other adjectives that make you think awesome things are just around the corner.
Then, in the wee hours of the morning, before logic was awake enough to take over, I was struck by the impossibility of these goals.
A 20% down payment would be massive. Verifying - or even maintaining - my income as a freelancer would be a challenge. Snatching up a home in the Denver market, without paying over asking price, seemed impossible.
My freight train of negativity was squelched by the calm logic of my boyfriend. “It’s ok, we’ll buy under our means so your income doesn’t matter, save what we can, and wait until the opportunity is right.”
Oh, well ok.
So we saved money. And waited. We browsed the internet for homes. We grabbed brochures on walks around different neighborhoods. And we saved some more. Then we stumbled upon the perfect opportunity and homeownership went from impossible to probable.
Two “P’s” could take the credit for this transformation: planning and patience. Here’s how we tackled the planning part.
Before Buying a Home
Unbeknownst to me, I started saving for the down payment on a home at the age of 18 when I socked away nearly every penny I received for high school graduation. From there I hoarded a large portion of every paycheck until I purchased a home more than ten years later. I just didn’t label it “house fund” until I decided that’s where I wanted it to go.
Maybe you are just two years out from your ideal home purchase date, not ten. That’s okay. Start saving now. Decide what you can comfortably afford to put away. Then determine what you could afford if you made a few sacrifices and stretched just a little bit.
The earlier you begin to save, the more flexible your timeline can be and the less stress you’ll have along the way.
Keep an Eye on Your Credit
After a recent check of my credit report, I stumbled upon fraudulent charges on a credit card I hadn’t used in 6+ months. Since the charges had gone unnoticed, the account had been sent to collections. While the credit card company quickly deemed the charges to be fraudulent, a few weeks after the discovery, my credit score plummeted. By more than 80 points.
One long phone call and three transfers later, I was finally told I needed to write a letter explaining what happened. Once the letter was received, the credit card company had 60 days to speak on my behalf to the credit reporting agencies.
The moral of the story: Credit issues are quick to come up and painful to correct. If you aren’t staying on top of your credit score and credit report, chances are you’ll stumble across a costly mistake at the most inopportune time - like when you're applying for a loan.
Get Rid of Financial Stumbling Blocks
My boyfriend is in the process of paying off the remainder of his student loans. While the monthly payment is small and the interest is very low, he opted to pay off a chunk before we applied for a mortgage. This lowered the debt visible to the lender while freeing up some cash for other expenses.
Whether you have student loans, auto loans, or consumer debt, work to lower this burden before taking one something as big and expensive as a mortgage. Not only will it lessen your financial stress, but it will make you look like a better loan candidate.
Know Your Budget and Loan Options
The panic I felt when we first went in search of a home to purchase was in large part due to the idea of a 20% down payment. That amount could be staggering even with a moderately priced home.
But in my case, 20% wasn’t necessary. In fact, since we only planned to stay in the home for 3-5 years, the 3.5% required by the lender made more sense (even when the Private Mortgage Insurance - PMI - required with less than 20% down). This required down payment was based on our loan type and overall financial picture - yours could be less or more.
In addition to loan options, knowing how much home you can afford is essential to prepare. We looked at two numbers: what we could afford vs. what we wanted to take on. The latter was much lower than the former.
Run some mortgage calculations to see what works for you.
During the Home Buying Process
Keep Your Spending in Check and Don’t Apply for New Credit
What you spend is just as important after you apply for a home as before. Here’s why:
- Lenders will look at your balances again before closing
- Unexpected expenses will pop up
When you first submit paperwork to be approved for a loan, there will be an initial check of your account balances. If there’s a large amount of money going in or out of your account, that signals a red flag to the lender. These transactions will need to be explained and could even jeopardize your loan approval.
Another red flag? Applying for new credit, regardless of the form. This too could signal a spending problem or another financial issue lurking under the surface.
The home buying process is fraught with unexpected expenses. There’s an inspection here, a processing fee there - the list goes on and on. For your own sake, keep your spending low and your savings intact to ensure you’re fully prepared for anything. These things factor into your credit score and staying on top of them will help your loan application process.
Turn Your Attention to Saving Post Home Purchase
And then there are the unexpected expenses that come up after buying a home.
When we were still renting, four major things in our home needed to be replaced within a seven-month time frame: the garbage disposal, water heater, air conditioner, and furnace. Talk about expensive.
Granted, this happened when we still had a landlord footing the bill, but it made us painfully aware of how things can go wrong without any notice. (Like when your water heater leaks all over your Christmas tree and the presents below. Or your air conditioner goes out on the fifth consecutive day of 100+ degree heat. But I digress.)
Whether you call this your home emergency fund or your no more landlord fund, make sure it’s ready and waiting for whatever comes next.
After You Buy a Home
Check In On Your Emergency Fund
You’re unpacked and ready to tackle life in your new home. But how are the rest of your finances looking?
If you dipped into your emergency fund in order to cover home buying expenses, now is the time to rebuild. Being able to bridge a gap after losing a job, for instance, becomes even more important after adding a mortgage to your name.
Think About Paying a Little More
After we signed the paperwork and determined our final monthly cost (things like property tax and homeowner’s insurance are estimates at the beginning of the process), we made the decision to pay more per month than what was required. We determined by each chipping in an additional $75 per month, we could contribute an additional $5,400+ throughout the time we plan to be in the home. This won’t all go to principle, but it is a painless way to build some additional equity.
If you have high-interest debt, (or even debt with an interest rate above your mortgage), this might not make sense. But exploring your options and seeing how paying more can help your financial future is certainly worth it.
How I Went From Panicked Renter to Confident Homeowner
One of the ways we managed to make the home buying process work for us was by looking at where we were already renting. It didn’t fit the exact space or location requirements we were originally searching for, but it allowed for something else: stronger financial certainty. Not only would we not need to account for moving expenses, but the monthly costs were far below our means. That meant I could continue to pursue my freelance writing career without sacrificing our joint financial goal of homeownership.
And, truth be told, buying a home wasn’t as panic-inducing as I once thought. Frustrating and complicated, perhaps. But with the right dose of planning and patience, it’s completely possible.