My husband and I have been on a hunt to buy our first house.
Unfortunately, we live in a very high cost of living area (Southern California) where a starter home can easily start in the $500,000 range.
We’ve oscillated back and forth this past year whether we really want to buy a house or whether we should just keep renting an save as much money as possible, but we cannot hide our true feelings: we both really want to be homeowners.
Is buying a house still the American Dream? I’m not sure if it is for everyone, but it definitely is for us.
The only thing holding us back is that the American Dream is becoming more and more financially unattainable for a lot of people in our generation. Generation Y and the Millennial Generation are graduating with staggering amounts of student loan debt.
This is making it very difficult to save up for a house when you’re still working on paying off your student loans. For the first 45 months of marriage, my husband and I worked to pay off $45,000 of debt, a combination of student loans, car loans and credit card debt. This past year, we’ve finally started focusing on saving up for a house down payment, but we’re still finding it difficult to get past certain setbacks.
Here are some setbacks for first-time homebuyers and how to overcome them.
The FHA Loan
The FHA loan has long been touted as the preferred loan choice for first-time homebuyers. This loan is specifically designed for people who don’t have the 20% required for a conventional home loan.
However, the FHA loan is actually coming out of favor with a lot of companies, specifically because what people end up saving by not having 20% down, they end up paying in costly other fees, a higher interest rate, and a high PMI.
If you have anything less than 20% down, you will be required to pay PMI- Private Mortgage Insurance, which is what lenders require as a sort of safety net on the house for giving you money for the loan.
With an FHA loan, your PMI will be greater than with a conventional loan. In order to eliminate the costly PMI associated with an FHA, you can save for a traditional loan. It IS possible to secure a traditional loan with lesst han 20%, but it will require saving at least 10% down. While this requires more time and effort up front to save 10%, it is much better than watching your money waste away in PMI from an FHA loan. You will still need to pay PMI, but it won’t be as high as with a FHA loan.
Saving for a Down Payment
My husband and I have been living on a strict budget and saving as much as possible in order to reach 10% down for a house down payment. This means we haven’t bought a new car (my husband’s car is 12 years old, and mine is 8), we haven’t gone on expensive trips, and we’re not buying fancy things. It’s a sacrifice, but we’re willing to do it.
If you need some help, check out these down payment assistance programs for first time homebuyers.
Having Good Credit
If you know you want to buy a house, you need to work on getting your credit score as high as possible in order to get the best interest rate. The higher your credit score, the more comfortable loan companies will feel loaning to you since you are not a big risk. It’s like getting rewarded for being good with your money!