The American Dream is a pretty broad, overarching concept with a diverse array of definitions. But do you know what one of the common threads between them is? Home ownership.
Ask anyone to tell you about their version of the American Dream and home ownership is going to be a leading point of discussion. There’s just something very tangible about being able to call a plot of land your own. But over the years, home ownership seems to have become less practical for millions of middle-class Americans. Knowing how to find a house within the constraints of a tight budget is something that will allow you to secure your very own piece of the American Dream.
How to Buy a House on a Budget
According to the latest numbers from the U.S. Census Bureau, the national homeownership rate is sitting right around 64.3 percent – it’s lowest point since at least 1965. And while economists and talking heads like to blame low ownership rates on the shifting attitudes of millennials, the truth is that other factors are involved.
“College loan debt is at an all-time high, crippling students’ chances of getting a secure foot in the homeownership market upon graduation. Not to mention, the competitive job market has also been getting increasingly complex for youth as well,” millennial Alli Guaman writes. “In a recent study by The Guardian, it is revealed that millennials earn, on average, 20 percent less than their peers or those older than they are.”
In other words, it isn’t necessarily a disdain for home ownership that’s holding Americans back – it’s tight finances.
The good news is that you don’t need tens of thousands of dollars in savings to buy a house. With a little bit of savings and some smart decision-making, you can buy a house on a tight budget. The following tips will show you how:
1. Know How Much You Can Afford
The first key to shopping for a house within a budget is to know what your budget is. You need a firm upper limit number that will keep you from overspending.
There are plenty of different rules of thumb for buying a house, but one conservative method says that your monthly mortgage payment (including principal, interest, taxes, and insurance) should be no more than 25 percent of your monthly take-home pay. In other words, if you bring home $5,000 each month, your house payment should be no more than $1,250. Using that formula, you can come up with how much house you can afford.
2. Wait and Save
While the 25-percent after-tax rule is extremely conservative – most lenders and financial gurus say more like 35-percent pre-tax – you may find that you aren’t really in a position to buy at the moment. If this is the case, don’t fret. You can always wait a few months and save up some money.
If you decide to wait and save, make sure you set specific goals and come up with a plan. For example, you might aim to save $500 per month over the course of the next year. In doing so, you can come up with an extra $6,000 to put towards a house.
Not sure where you’ll come up with extra savings? Consider things like cutting cable, not eating out, eliminating online shopping, or picking up an extra job on the weekends.
3. Differentiate Between Needs and Wants
You may need to lower your expectations to find a house that you can reasonably afford. The key is to know the difference between needs and wants. And what you’ll soon realize is that actual needs are few and far between.
A brick house is not a need; it’s a want. Having an apartment on a particular street downtown is a want, not a need. Having a big backyard probably isn’t a need, either. By stripping back your expectations and understanding that this isn’t your “forever” home, you’ll be able to make a much more moderate purchase.
4. Zoom in On the Right Neighborhoods
Location has a huge influence on pricing. While you may want to live in one specific neighborhood or zip code, you could potentially save thousands of dollars by expanding your scope and buying something that’s just five or ten minutes away.
5. Be Willing to Put in Some Sweat Equity
When you realize that you aren’t necessarily in search of your forever home, you can lower your expectations and take on a house that’s more of a “project.”
The best way for budget buyers to find a good house is to purchase with the intent of putting in some sweat equity. This means being willing to buy a house that needs some cosmetic upgrades – such as fresh paint, new countertops, new flooring, and other updates.
6. Look for FSBO Properties
Have you considered buying a For Sale By Owner (FSBO) property? While they’re few and far between, you should be able to find some in your area. And if you’re lucky, you may stumble upon a situation where the seller is looking to quickly unload a property (or doesn’t understand the full value).
7. Consider Buying a Duplex
One unconventional method savvy homebuyers might consider is the purchase of a duplex. While it isn’t a single-family home, it could allow you to rent half of the property and use that income to pay off your mortgage.
8. Hire an Agent Who Can Really Negotiate
Finally, be sure to hire a real estate agent who has good negotiating skills. This will ensure you’re able to get the best possible deal on a house.
Green Residential: A Leader in Houston Real Estate
At Green Residential, we understand the Houston real estate market like few others. That’s because we have decades of local experience being directly involved in multiple areas of the industry – including property management, home buying, and home selling.
If you’re interested in learning more, feel free to give us a shout.