How long in advance should you be preparing to buy your first home? There are a few common obstacles to purchasing property:
- Accumulating the down payment
- Cleaning up or creating a good credit history
- Deciding your priorities
- Budgeting so that you can live within your means while saving and after buying your home
(1) For most people, accumulating the down payment means saving money. This is very challenging, especially when people are accustomed to living on 100 – 105% of their income! This is an extremely common phenomena. It is always tempting to want to “reward” yourself with expensive dinners, lavish travel, luxury cars and other perks that make you feel like you have arrived. It is harder, but smarter, to see the reward as the fruit of discipline and to chart a goal and work toward it steadily.
How much do you need to save? There are a lot of variables here. Getting 20% down means saving a lot on the financing costs down the road. But if you can purchase with a small down payment (really hard to do with multiple offer situations), you can get there faster and perhaps will pay less than if you wait until you have a bigger down. A few years ago I met someone who saved diligently for more than 20 years to buy a home. Think about what has happened to the cost of housing in that time! Prices have about doubled since then. So don’t spend too long saving, lest inflation eat away at any benefits you get from the larger down payment.
It should be noted that if you are able to buy with FHA backed financing, your down payment can also be gifted from family and friends. That can speed up the time frame. (My 20-something kids will find this of particular interest, I am sure!)
(2) After the brutal “great recession”, many Millennials and many of our international home buyers are credit averse and want to pay cash on everything so as to avoid the plague of debt. The downside to this is that if you don’t have any debt to repay, you also won’t have a credit history which will be sufficient to obtain a mortgage. Consider a low limit credit card that you can pay off in full each month as one way to begin building credit.
Costs on interest, penalties and fees (such as annual subscriptions) on credit cards vary widely. Before deciding on one, vet it! There are many tools online for analyzing which credit cards are the least expensive to have (or enjoy the biggest perks, such as miles). A good comparison chart can be found on MSN at this link:
http://financialtools.money.msn.irsws.com/best-credit-cards
(3) Prioritizing – a book could be written on this topic. I would like to suggest that you do a lot of homework on this subject, talk with trusted owners of real estate and a good Realtor for assistance with determining the order of priorities with real estate purchases. (Hint: location is still the most important thing!)
(4) Budgeting – once you have a predictable income, budgeting should be a very immediate priority. Do remember to make allowance for emergencies (unexpected dental work, auto repairs, trips to funerals) and other important things. Saving a little bit over the long haul can result in great advances toward your goal. Budgeting, and then living within the boundaries you set for yourself, is a huge help in getting you where you want to be!
How old should I be when purchasing my first home?
In the U.S., the average age for first time home buyers is 30. That doesn’t mean that 30 should be your target! See if you cannot purchase a house or condo sooner and begin to grow your equity and plan for your future sooner. What’s the rush? If you are able to purchase a property that you won’t outgrow, and you faithfully make those payments over 30 years without taking money out – the great temptation of the last half century – you will be in a position to retire a little earlier. Big goals – and worth the effort.
