You’re at a barbecue at your friend’s new house. In between mouthfuls of corn on the cob and burgers it seems just about everyone is discussing their new home or their hunt for one. You smile and nod but can’t relate. Instead, you’re wondering how you’ll ever be able to afford a house.
Deep breaths. Buying a home is likely the largest purchase you’ll ever make, making it feel overwhelming and nerve-wracking from the start. Where do you even begin? How do you save for a down payment on a house when you debate whether you should buy that new sweater? What if you already cut cable at home to save money?
Here is a guide that will lay out options and provide a game plan that will help minimize the stress of saving so you can turn your dream of buying a home into a reality. We’ll explain how credit plays into homebuying, introduce loan programs geared specifically toward those with a low income, and offer tips on how to cut back on expenses and save for that dream house. You’ll walk away with a greater understanding of what it takes to buy a home and some steps that will realistically work for you to get started.
How much you can afford right now
Before getting into how much you’ll need to save, you’ll want to determine how much home you can actually afford with your current income. The most important factors in calculating this are your total monthly income, your monthly minimum debt payments, cash you have on hand that will help cover a down payment and closing costs, and your credit profile.
We’ll start with your credit profile. You’ll want to have a strong credit score so that you can qualify for a home loan and get a good rate. For most home loans, a credit score of at least 620 is needed. If you have a score of 740 or higher, you’ll likely get offered substantially lower interest rates. However, scores in the 500s can be insured through the Federal Housing Administration (FHA), though scores below 580 will require a down payment of 10% or higher. Credit scores are checked through Experian, Equifax, TransUnion, and you can see your credit report from all there for free at www.annualcreditreport.com. If your score isn’t where you want it to be, don’t worry. Try to keep your credit card utilization low (ideally no more than 30% of your total limit) and pay off your bills monthly.
It’s a good idea to keep a thorough list or spreadsheet of your regular monthly expenses, such as rent, utilities, student or car loans, food, and phone and internet bills to help you track.
Once you have an idea of what your income, debts, and credit look like, use a down payment calculator to estimate how much you should put down on a home and which loan options may work best for you.
How much to put down
We have all heard of putting down the traditional 20% for a mortgage down payment, but this isn’t a requirement for most loans. If you have enough savings to put 20% down, it means you’ll be able to finance less and enjoy a lower rate while you’re at it. You’ll also avoid paying private mortgage insurance, or PMI. PMI applies to conventional loans and protects the lender should you be unable to pay your mortgage loan. Lenders will offer PMI in the form of a monthly premium, added to your mortgage payment. Mortgage insurance costs are typically anywhere from 0.5% to 1% of the loan amount annually, and it can be dropped when you reach 20% equity.
How low can you go?
The 20% down figure can be an intimidating number and feel like it may take a while to save up for. Good news: Some loan programs allow homebuyers to put down as little as 3% — or even none at all.
Additionally, down payment assistance (DPA) programs help homebuyers with loans or grants that reduce the amount they need to save for a down payment and/or closing costs.
For example, top California agent Jenny Rosas recalls working with a single mom who reached out to her during fall of 2020 and wanted to purchase a home in the Sacramento area, but felt there wasn’t much available in such a competitive real estate market. A hard worker with an hourly paid job at a nearby prison, the client was able to save and use the Neighborhood Assistance Corporation of America (NACA) program through Bank of America. NACA is the largest U.S. Department of Housing and Urban Development (HUD)-approved counseling agency, providing more than 31% of the housing counseling in the country.
“It’s a fascinating program, but it’s very daunting, especially in the California market, just because price points go pretty high. But she was able to purchase a $325,000 home,” Rosas said. “She saved up $15,000 during one year, not only taking care of her daughter, who also was working an hourly job, but she had it set to pay down her debt, credit card, and car loan, and had a concrete goal. I think the most important part was that she was very positive, excited, and transparent.”
“Those are the types of clients you really want to serve,” Rosas adds. “They’re checking in on a quarterly basis, whether it’s picking out a home or giving an update that they paid down on a credit card. That was a really wonderful success story with her.”
Rosas said those earning a lower income tend to gravitate toward first-time homebuyer programs. After assessing your financial health and getting your credit up to par, it’s important to be transparent throughout the homebuying process with your real estate agent and lender.
“With a first-time home buyer program you only need 3% down for certain programs. So it’s extremely doable for young families who have that goal set in mind,” she says.
Other available options
Rosas says some clients max out payments to their 401(k)s to save for a home because they can borrow against them.
“My partners use this strategy when it comes to getting a low-income client approved and getting into that home,” Rosas adds. “Another tip could be to explore gifts from families or other sources you can get funds from.”
Loans and programs for buyers with lower incomes
There are more than 2,000 mortgage assistance programs and grants currently available. Many are on a city or county level, with very few national and statewide programs. To get a feel for what’s out there, do a Google search for down payment assistance grants in the city or state you are home buying. Another good bet is to speak to your friendly loan officer. They should be up to speed about local programs and which ones work with lenders.
Below is a rundown of some popular loan programs for first-time buyers.
HomeReady and Home Possible
These programs are offered through Fannie Mae and Freddie Mac, respectively. The HomeReady program by Fannie Mae helps lenders work with people who are deemed credit-worthy to borrow for a mortgage. One step involved is taking a homeownership education class through Framework by Fannie Mae. This online course takes just a few hours and can be done on your phone (think on your work lunch break). More than 90% of past participants feel they have increased their knowledge of buying a house through this program. HomeReady allows as little as 3% down and competitive loan pricing.
Home Possible by Freddie Mac also offers a down payment as little as 3% as long as your annual income doesn’t exceed 100% of the area median income (AMI) or a higher percentage in designated high-cost areas. To see sample AMIs in a city such as San Francisco, for example, click here.
The U.S. Department of Agriculture (USDA) offers homeownership opportunities to low- and moderate-income rural Americans that are based on income and vary according to the AMI for each area. USDA loans feature low fees and 0% down payments.
If you are a service member, veteran, or an eligible surviving spouse, you may qualify for a home loan benefit or housing programs offered through The U.S. Department of Veterans Affairs. In addition to helping you with a mortgage, there are programs to help you build and repair a home.
VA home loans are provided by private lenders, such as banks and mortgage companies. There is no down payment required. Borrowers must meet certain standards for credit and income and fill out a Certificate of Eligibility (COE).
Federal Housing Administration loans
A loan backed by the FHA — which is part of the U.S. Department of Housing and Urban Development (HUD) — is a government-backed mortgage loan. This means that should you default on the loan, the FHA will protect the lender. An FHA loan offers less stringent credit score requirements (even if you have a bankruptcy in your credit history) and lower minimum down payments. This leniency does have some catches. The home you’re looking to buy has to be appraised by an FHA-approved appraiser, it must be your primary home, and mortgage insurance is required. In 2020, the FHA insured more than 1.3 million single-family mortgages for a total mortgage amount of $310.3 billion.
Good Neighbor Next Door
HUD’s Good Neighbor Next Door program is geared toward law enforcement officers, pre-K- to 12th-grade teachers, EMTs, and firefighters, who are encouraged to purchase and live in homes in “revitalization areas” or distressed urban communities. HUD will provide 50% off the list price of properties and in return, the buyer commits to live in the property for three years and use it as their primary residence.
Steps toward saving
It’s important to set a budget to get into the habit of saving. This may seem challenging when you are stretched thin to begin with. With small steps, though, it can be done. If you don’t have your heart set on a particular geographic area or home size, you may consider moving to a less expensive area or extending the timeline for buying so you can give yourself more time to save for what you really want. You may also consider getting a smaller apartment or a roommate to help reduce expenses for the time being.
You can also assess your job responsibilities at work. Have you taken on more work since your last performance review? If not, seek out projects or ways to gain more visibility at your job so that when it comes time for that salary increase discussion, you’ve got the stats to back up what you’re asking for. If your workload has increased, don’t be afraid to ask for a raise so you can sock away even more in savings. If that’s not an option, you may think about getting a new job that may pay more.
Make life easier with automation
We auto pay our bills and use our phones for just about everything, so why not automate savings and investments? Automated credit monitoring tools and financial apps mean less to think about. In Rosas’ quarterly check-ins with her clients, she’s seen success when they use an app to track credit.
“I had one client that was addicted to shopping,” Rosas says. “She got her paycheck and would go straight to the mall. When she started saving, she would remind me she didn’t buy those shoes, which is great.”
There are countless automated savings and investing apps — such as Credit Karma, Acorns, Qapital, and Chime — that can help you save or earn extra cash without having to think about it. Some apps offer ways to stretch your dollars even further through investing. Spend some time exploring platforms and services to get an idea of which apps are best for your unique financial situation.
Stash, an app that is also a registered investment advisor and fiduciary, offers low cost monthly plans as low as $1 that can help make investing more approachable, with financial guidance to boot.
“People can get started on their investing journeys with as little as 1 cent, and are met with educational content and personalized tools every step of the way,” explains Sarah Spagnolo, VP communications at Stash. “Beginners are celebrated on Stash. In fact, 95% of Stash customers have little to no investing experience, yet after spending time on the platform, Stash customers become 15% more financially literate than the average American. And that literacy grows over time.”
Spagnolo recommends investing what you can on a regular basis, diversifying your portfolio(s) and investing for the long term. This can help you work toward your unique financial goals, from an emergency fund to a down payment on your first home.
Do the hustle
If your current job isn’t paying what you’d like, consider a side hustle as you seek out better alternatives. There are more options than ever now, especially with the rise in remote working and flexible schedules.
While you won’t have control over the cost of some of your bills each month (monthly car payment, rent), you can control some of your weekly expenses, such as eating out or impulse buys. There are plenty of blogs on meal prepping to save cash and avoid the frantic scramble for takeout after a long day of work. Some are even subscription-based and provide full shopping lists and weekly meal plans for you, so you don’t even have to think about what to make. If figuring out your grocery shopping list and what to cook is time consuming, it may be worth the small monthly fee, or discounted yearly fee, to have that taken care of for easier savings in the long run.
Go even further and skip your daily coffee shop run by making your own coffee at home. Saving those few dollars each day will add up, especially if you put what you would have spent on coffee or lunch out into a savings account or use an investment app.
With a savings strategy in place you’ll be on your way to becoming a proud homeowner, and build equity toward your future, saving in the long run.
“There are a lot of moving pieces with family and living situations and leases that folks come to me with,” Rosas says. “The biggest takeaway is that it starts with the basic fundamentals of financial literacy when I’m guiding them. It’s important to know it is possible that a down payment can be as low as 3% and you can get into grant programs. It really starts with the small steps. Go through training and get familiar with financial literacy before you begin the process so that you’re armed with information on what you’re getting into.”
Header Image Source: (Katie Harp / Unsplash)