Thanks to the Federal Housing Authority, it is possible to purchase a property with a down payment of as little as 3.5%. The median value of a house in DuPage County is $281,700. That means you must save $14k-$19k to cover the 3.5% down payment and closing costs. Saving $19k may seem like a big goal especially if you have student debt and other responsibilities. However, it is possible to pay back your debts and save a reasonable amount to purchase your dream house.
How much can you afford to pay for the house? Calculate the amount by looking at your current monthly income. The lenders will not approve your mortgage application if the Debt-to-Income (DTI) ratio exceeds 33%. In some cases, your total debts should not make up more than 28% of your pre-tax income.
Owning a house, means, you are also responsible for other expenditures. That includes closing costs, ongoing repairs, HOA fees and so on. Aim for a DTI of 20%-28% and adjust your down payment requirements accordingly.
A pre-qualification letter can also give you a good idea of your purchase power. Contact relevant lending institutions and ask them to give you an estimate based on your current savings and monthly income.
$500 and $500 Rule
Let’s play a financial game. Brainstorm 5 ways you can earn an extra $500 per month. You can try freelancing, a part-time job or by working overtime on your current job. There are various ideas you can use to earn an extra $500.
The next part of this game is to save $500 each month. This is where you plan and budget your expenses. Negotiate your rent, find out how much you are paying in interest rate, and see if you can cut money on big-ticket items such as student loan. Set a flexible budget. You want to save for the house, but you do want to create strict boundaries. The budget should be flexible enough so that a $100 spent here or there does not cause you trouble.
Improve Your Credit Score
What is your credit score? Pull out a free credit report from any of the major credit bureaus. The credit report may have errors that might impact your score. In that case, request that the information to be verified, and correction should be applied to your score. It might be a good option to connect with a credit repair company.
You may ask, why credit score matters when I am saving for the down payment? Let’s do some calculations.
The median home value in Illinois is $281,700. After subtracting the 3.5%, your loan amount will be $271,840. Here is the interest rate amount you will pay based on different credit score numbers:
You will pay around $270k in interest rates (over 30 years) if your credit score is less than 620. You can save $90,675 if you raise your credit score to 760+. That is a hidden saving. Having a good credit score also gives you other benefits. FHA loans have a minimum limit of 3.5% down payment, but you can qualify for first-time home buyer’s program with 1% or less down payment.
The ideal situation is to save 20% because for anything less than that, you must also pay for the mortgage insurance. However, in case, you do not want to lock this money into the house, then improving your credit score gives you the chance to get approved without having to pay the traditional 20% sum.
Set Up an Automated Savings Plan
How much time do you have to save for the down payment? Depending on your timeline, you should create an automated savings plan. Use online tools given by any bank. What happens is that your salary goes into the current account and a percentage of that money goes directly into your home saving’s account. This system takes the effort out of the budgeting system. You do not have to think about saving money. The funds are automatically transferred to the relevant account. You can relax and enjoy as your finances are being taken care of.