There are a lot of factors that are bringing more and more people into the housing market race. Lowest mortgage rates in history, the emergence of flexible work options and working from home, stimulus payments that allowed some Americans to remove debts, and a need to be closer to family. Maybe some or all of these apply to you too. But you think there’s no way you can afford to buy a house. Not on your salary, not in your state or city, not with all the items on your wish list. I’m here to tell you you’re wrong. And I know that from experience.
For full transparency, I’m a typical millennial. I graduated from college with substantial student loan debt, started my career after the 2009 economic collapse, and thought there was no way I’d ever be able to own a home. This was due to several outdated and simply untrue misunderstandings of what you need for homeownership.
I’ve seen the same headlines as you too, about the people making next to nothing who own a half a million dollar house. You click the link and find out they either inherited the home, had substantial financial help from family, or were hired to a high paying job outside their experience level, again because of family or friends. I had none of this, unless you count living with my parents for about 6 months after graduation while I tried to find a job. So, it is possible for “normal” people to buy a home.
Reason #1: Down Payment
First, I think the biggest myth, and therefore the most hurtful to homeownership dreams, is that you need to save 20% for a down payment before you can even think about buying a home. This is 100% untrue. While there are advantages to paying 20% or more, the fact is that you need at the lowest 3% with a conventional home loan. There’s even zero-down loans as I’ll talk about later.
If you’re looking at a home at the June 2021 median price of $363,300 (which is actually a record high), 20% is $72,660. However, 3.5% is $10,899. While almost $11,000 is a lot, and will most likely take a while to save, it’s going to take you a lot less time than $72,000.
This is just the median home price however. Most first time home buyers are buying considerably less expensive homes, dropping the dollars needed by quite a bit. Of first time buyers between the age of 22-40, 47% bought a home between $85,000-$199,999. In this range, 3% at the most is $6,000.
The only reason 20% down payments are considered the norm is because without that much down, you have to pay something called PMI, or private mortgage insurance. This is extra insurance you pay as part of your mortgage payment that basically tells the bank you’re good to make the payments on your loan. Then, once you’ve paid 20% of your home’s value back, between down payment and mortgage payments, you can tell you mortgage lender to stop charging you PMI.
PMI is anywhere from 0.5% to 5% of your loan amount paid yearly. So, if you had a $200,000 house and your PMI rate is 1%, you’d have to pay $2,000 a year, or $166 per month. Depending on what you put for your down payment, you could pay that much for a short time or a while, depending on how long it takes you to get to 20% paid on the loan.
Reason #2: Payments
Another reason people think they can’t buy a home is because of the mortgage payment. Most people assume that the payment on a home is going to be more than rent. Generally, this isn’t true for people living anywhere but more rural areas.
The average price of a 1-bedroom apartment in the top 100 most populous cities is $1,624 for June 2021. That outpaces the average monthly mortgage payment of $1,200. One thing to note when you see the term “mortgage payment” is that the amount usually only includes your principal and interest. Things like property taxes and homeowners insurance are added to the mix when the term “loan payment” is used.
This is an important distinction, but even with the cost of taxes and insurance, your overall total monthly payment is going to be comparable to what you’re probably paying in rent. But, you’ll also most likely get a yard, more bedrooms and bathrooms, and the freedom to do what you want as far as decorating, renovating, and overall look and feel of your home.
Plus you’ll start to build equity. The sooner you can start to build equity, the better off you’ll be in your real estate financial health. Equity is the difference in what your home is worth and how much you still owe on your mortgage.
Instead of paying rent to your landlord and getting nothing out of it but a place to live, you’ll be paying a bank your “rent”. As house prices continue to rise, and your amount you own on your loan continues to decrease, the difference is essentially money in your pocket. When you go to sell your home down the road, you’ll profit whatever the difference is.
When you go to buy your next house then, maybe you can afford to put down 20% or more. This will save you money by not having to pay PMI. But, you also pay off more of the loan upfront, and this will make your monthly payment lower too. This is why being able to own a home as soon as you can is crucial over your lifetime.
Reason #3: Loans
As I mentioned with the down payments, there are some loans that require no down payment, or allow you to roll some of the closing costs into the loan, meaning you don’t pay that money in one chunk but rather monthly over the life of the loan. This is a huge savings when coming up with money upfront to buy a home.
FHA Home Loans
FHA home loans are an excellent option for a mortgage that I feel don’t get enough attention. I had never heard of FHA loans until after I bought my first house, and I wish I would have. These loans are backed by the Federal Housing Administration, which helps guarantee to the mortgage lenders that the loans will be paid back one way or another if you happen to default, or not be able to pay your mortgage. This is how the loans are able to be approved with lower down payments and credit scores.
These loans only require 3.5% down payment (although you can choose to pay more) and have a lower credit score requirement of 580. You can qualify with a credit score as low as 500, but you will need to pay closer to 10% for a down payment in that case. They have similar interest rates as conventional loans, which are at all time lows right now.
One down side of a FHA loan is that you’ll have to pay Mortgage Insurance Premium (MIP), similar to PMI, for the entire term of the loan, not just until 20% has been paid. Usually MIP is around 0.85% o0 1.75% of your loan amount. However, you can always refinance your FHA loan at any time. Then, you will not have to pay any loan insurances.
If you’re lucky enough to have someone in your life give you money for a down payment, 100% of the down payment can be a gift. You cannot have 100% be a gift with a conventional loan.
USDA Home Loans
Another loan option is a USDA home loan. This is another government backed loan option, but it only applies if you’re buying a home in a rural location. Rural doesn’t mean you’re buying a farm in the sticks, but there are population requirements for the town or city you’re moving to. Up to 30,000 people can actually live in most approved cities to still be considered.
USDA home loans are unique in that they require 0% down payments! However, there are very strict income requirements that come along with that. These vary by state and county, as this type of loan is meant for lower income earners. USDA loans are harder to qualify for with the income and location requirements, but provide so much up front value if you can get approved for one.
Additional Factors to Consider
I understand that there are all kinds of barriers to homeownership, and financial situations are different for everyone. But it really is easier than you think to get approval for a house, and can cost less too. I would highly recommend you reach out to a mortgage lender and just see what they say. See how much you can be qualified for, what your potential interest rate could be. Use that quote to find out what it translates to as far as a monthly mortgage payment.
If you want to determine what your overall monthly payment would be, call up your car insurance agent and just ask for a homeowners insurance quote. They’ll want to know some details about the home you want to insure. Just let them know you’re exploring your options to make sure you are financially able to purchase a home. They’ll at least need to know the home’s value, which is why you’ll probably want to do this step after you’ve talked to a mortgage specialist.
The last piece that makes up your monthly payment pie is property taxes. Again, this number is going to be different for literally every house. But, if you want to get a ballpark figure, property taxes are public record and can usually be found on your county’s website. This will take some detective work, finding a home on a pricing website that’s in your approved range, then searching that address on your county’s page. But, this will be one of the most accurate ways to get a property tax estimate.
Homeownership Is Possible
Even with lower credit, seemingly endless student loans, or any other number of barriers, homeownership is still completely possible for most people. It can be hard to save money for a down payment, and it definitely won’t happen overnight. But you’d be surprised how quickly you can actually buy a home for yourself.
Plus, Homes for Heroes is able to help with your home buying journey. If you’re a teacher, in the military, law enforcement, firefighter, EMS, or healthcare worker, we’ve got your back. We connect you with a real estate agent and a mortgage specialist to help you every step of the way. These are the people to answer all your questions, and to help you understand costs.
Plus, once you do buy your home, you’ll get Hero Rewards back after closing, just for being a hero. On average, our heroes save $2,400 when buying a home that you’ll get back as straight cash. You can use it to make your first few mortgage payments or decorate your new house.
If you’re interested in finding out more about our program, you can sign up for a real estate agent to connect with you. There’s no obligation to sign up for the program, and there’s no cost to you to use us either. It’s the same buying process that you’d have with any other real estate agent, just without the Rewards. Sign up today to get the ball rolling on owning your own home.