For the past two years, my goal has been to purchase a small-ish house in the near future. My “near future” has changed a bit over time from 18-months to more like 2-3 years mostly because I really would like to save an ample down payment on a house. But with all my research on the price of homes in my neighborhood or a neighborhood in which I’d like to purchase a home, it really comes down to “What can I afford realistically?”
During the housing boom, many people forgot to ask themselves this question. Historically, the financial sweet spot has been to purchase a home within 3-times your annual salary range. For example, if you gross $80,000 annually, you can comfortably afford a $240,000 home. Of course, in Southern California this limits me greatly with houses still averaging over $320,000. But all is not lost. There are places throughout California where I can still find a home for under $250,000 (but no where near where I currently live). Of course the questions comes down to “Do I want to live there?”
I digress. Guiding home affordability, besides the simple 3-times your salary financial rule, are mortgage calculators. There are some terrific calculators out there that factor in your down payment, home owners insurance, and property taxes, calculate your monthly payment and how much you will pay in interest over the span of the loan. The amortization charts are always scary to analyze, but paying off your mortgage early can alleviate some of that anguish by lowering your total interest payments. Just because you agreed to a 30-year mortgage doesn’t mean you can’t pay it off earlier.
Once you’ve worked the numbers out and have found a price you can comfortably afford, it’s time to get the rest of your ducks in a row. That means, making sure you have little or no consumer debt, your credit score is closer to stellar than subordinate, and you have saved a decent down payment (as close as possible to 20% or more.) Don’t forget that you’ll need some money for closing costs, so factor that into your savings as well. You might also want to factor in repairs and maintenance money as well.
As I prepare to purchase a house in the next two years, my goal is to save about $60,000. A lofty goal, but with dedication and determination, I should be able to make it!
Update 2016: Mr. LH and I were able to save half of my initial goal, or $30,000, in two years. And it took us a little while longer than we had planned to begin this goal. We’re now waiting for our manufactured home to be finished.
How did you prepare to purchase your first house? Any tips or guidelines you’d like to share?