Much is being written about how it is becoming harder to purchase a first home. Is home ownership out of reach?
The problem for years is that the values of homes kept going up with no visible ceiling in sight. Then came the 2008 recession and housing market collapse. While housing prices adjusted downward, the ability to obtain financing became much more difficult. Added to this problem was the increased difficulty of potential young home-buyers to make ends meet while carrying significant debt loads from college. While the housing market has now rebounded and interest rates are low, the median household income has not risen much to help take advantage of the home buying opportunity.
Given the difficulty to own your first home, here are some ideas to consider to make your dream a reality.
Location. One strategy is to buy a more affordable, less expensive house in a great location. Over time this smaller starter home will more likely increase in value providing some equity for your next purchase.
Start small. Consider making a condo in a high demand area your first home. As long as you do not over pay for the condo, you will be building equity for your next purchase.
Save money. Start saving money for a down payment now. Ten percent is a good target, with twenty percent being ideal. Remember, new regulations make it more difficult to take gifts as a down payment for a home. If you have someone willing to support your home purchase, try to receive the down payment gift long before you need it.
Check out low down payment lending programs. There are a number of options to reduce the amount of down payment required on your first home. The most common is FHA, but the fees can be high. The Veteran’s Administration has a no down payment option. But also check out local banks that have small down-payment requirements when you purchase mortgage premium insurance.
Get pre-approved. Shop banks and financial institutions prior to looking for a home. They can walk you through the financing process, check your credit, and give you an estimate of what you can afford. Have the bank provide a pre-approved letter to help in your negotiations with the seller.
Use “handy” to make it affordable. If you are handy with tools and making repairs, consider targeting a well built home that just needs a face-lift. This do-it-yourself attitude can save you money on the purchase price of a home that needs some work.
Use tax breaks. Forecast your taxes with the benefit of home mortgage interest and property taxes as itemized deductions. Remember you can also use up to $10,000 in traditional IRA funds penalty-free to help pay for your first home. You will still owe income tax on the withdrawal, but can avoid the 10% early withdrawal penalty.
Buy direct. Consider alternatives to the traditional home buying experience. Talk to friends and family to network into target neighborhoods and find homes not yet listed. Perhaps you can even find a seller willing to take a contract for deed for your home purchase to save on financing fees.
Control the offer. Offer only what you believe you can afford, not necessarily the seller’s asking price. You may get pressure to offer more, but resist the temptation. You are the one that will need to make the mortgage payments in the years to come.