With fast-rising home prices and interest rates that started to escalate this year, saving up for a down payment seems like a dream for many in the current market. It’s not just about how difficult it is to save up for the 20% down payment of a house that would likely cost between $400,000-$500,000. It’s also about how you’ll simultaneously have to pay your debts, rent, and save up for retirement. Can it be done? How should you set up your priorities?
For starters, let’s talk about debt. If you’re a millennial saving up for their first home, then you might also be in the process of paying down your student loan debt. Will this affect your prospects of being a homeowner in the near future? Remember that student loans are more forgiving than credit card loans. They have a longer repayment time and hence are not bad for your credit score. It will not prevent you from getting a mortgage. However, it may affect the amount of mortgage you’re approved for.
What you really need to watch out for is credit card debt. The ideal scenario is that you focus on eliminating your credit card debt before starting the process of buying a house. No, it will not be an easy task, but consider focusing on the highest interest debt first, since that’s the kind that will increase quickly. Also, just being practical, being deep in debt, and then buying a house sounds like a sure way to not be able to make ends meet later on. At Timber & Rose, we have access to free credit improvement services so don't hesitate to contact us if you want an expert to help you navigate improving your credit score.
Paying down your high-interest debt will improve your chances of qualifying for a larger mortgage at a favorable rate. Also, as you reduce your debt you’ll be able to use a higher amount of savings for your down payment. Look at it as part of the process to start saving for your future home.
Options You Can Assess Before Giving Up
Even by focusing on the right things, like getting rid of your credit card debt, you may feel that you’re not saving fast enough to make real progress. Unfortunately, if you’re planning to wait for prices to fall you’ll likely be waiting for some time. Remember that the high-priced market we have right now is a result of low inventory and high demand, which is unlikely to change soon.
So, is it a lost cause? There are options. For instance, you may want to save up the 20% down payment, but you don’t HAVE to. You may feasibly get a home with a down payment of up to 3.5%. It will require PMI (Private Mortgage Insurance), but the lender will typically cancel this added expense on your mortgage once you have around 20% equity. There are loans available with no PMI for only 10% down. Call Phil or Jesse at Timber & Rose Realty Group for more information if this is of interest to you.
Also, while prices are not set to decrease any time soon, price growth is expected to slow this year. If this happens, we’ll see more balance between home supply and demand. Other options you can look into include mortgages secured by properties with an ADU (Additional Dwelling Unit), for clients who are hoping to rent out part of their primary residence to pay their mortgage.
Finally, if you are looking to buy in a hot market like Portland, it’s important to assess your priorities. Think about the non-negotiables for your home and be aware that maybe you won’t be able to afford a home that has everything on your list. This doesn’t mean that you’ll never have your dream home, that's what we specialize in helping people get! Getting to your ideal home can be like a chess game and sometimes it requires a few more moves than expected to get you where you want to be.
As we always say, whether or not it’s the right time will come down to your particular circumstances. If you’ve decided to become a homeowner this year or want to assess your options before jumping into the market, we’re happy to offer our professional advice. Contact us at hello@timberandorse.com and we’ll set up a meeting. Another great place to start your home buying journey is with our free monthly home buyers class. You can sign up here.