How to Buy a House
Follow along with Cyn and kobold Astro as they buy their first house (castle.)
Are you ready to stop paying rent and start building wealth from the comfort of your dream home? This guide will show you how to go from paying someone else’s mortgage to owning your own home. Saving a down payment can be intimidating and feel impossible, but at the end of the day you just need some new habits that I will teach you. Follow along with our couple Cyn and Astro as they embark on buying their first home.
Laying the Groundwork
Before we can even talk about the down payment, we need to talk about your overall financial health. You won’t be able to save for a down payment and secure a home loan if you are living paycheck to paycheck, have poor credit, or are drowning in debt. Thankfully I have written articles to help you with all these things.
If you are living paycheck to paycheck, you need to start by auditing your spending to see if it is sustainable. See if it aligns with the 50/30/20 rule, and if you are spending more than 50% on needs and more than 20% on debts, then you will need to either find ways to save money by cutting expenses or look into earning more money. You’re going to want a healthy emergency fund in order to save for that down payment. It’s a vital step in breaking the debt cycle. We also need to make sure that you have a good credit score for the next step.
Having a healthy credit score will help you refinance any unsecured debt from credit cards that may be weighing you down. It will also be important in securing your mortgage loan. So, if you have a score that needs work, then make sure you read my article on the fundamentals of building credit first. This is one of the foundational pillars for getting your first home.
In terms of debt, you want to make sure that you do not have too high of a debt-to-income ratio. In other words, have you already promised too much of your income to car payments, student loans, and credit cards? If this is the case, you should focus on paying some of this off or refinancing it into a lower payment to keep your debt to income lower than 40% for the mortgage. If this is where you are at, you can use the snowball or avalanche methods to paydown your existing debt.
Once you have these three things under control, then we can start looking at the home buying process. From saving up that pesky down payment to closing on your dream home. Our daring couple is very excited to get started, but they don’t have any money saved. Looks like they are going to need to build that pile of cash first.
Saving Your Down Payment
Everybody must start from somewhere, and Cyn happens to have no money saved for a down payment. Yes, he is really breaking stereotypes by being a broke dragon. Cyn lives in Madison, WI and the average home price is around $360,000. Cyn and Astro would need to save $72,000 for a 20% down payment and their monthly mortgage would be around $2174. They could get away with a 5% down payment of $18000, but then their monthly mortgage would be $2525 with added private mortgage insurance (PMI). Think of that as an extra fee you pay for the audacity of not having enough generational wealth for a down payment.
They decided to go with a goal of saving $54,000 for a 15% down payment. With a number that big, they know they will need to make some big changes to make that work. They decide to do their best to save and they split the down payment into two $27,000 chunks.
This is where those habits mentioned in the beginning come into play. Cyn and Astro have decided to create saving rules that will help them move into their dream home.
1. They will each set aside $450 a month into a joint money market account.
2. They will put their entire tax return and windfalls each year into that joint account.
3. They will each pick up a side gig and put all that money into the joint account.
Rule one will make sure that they have their down payment in 5 years at the latest, while rule two and three will help steamroll the process to a faster end date. Using this method our handsome couple was able to finally save up their down payment for their first home. They are really excited for the next steps but have no idea what to expect from the home buying process.
The Home Buying Process
It took some time, but our couple managed to save their down payment, raise the kobold’s credit score, and even paid off some debt to lower their monthly liabilities. They are ready to meet with a mortgage loan officer! They go in for an initial pre-qualification session to see where they are in the process without officially applying or having their credit pulled. After talking with their Mortgage Loan Officer, they decide they are ready to put in an application online and seek pre-approval. After gathering recent paystubs, W2s, and some tax returns since Cyn is self-employed, they go through the pre-approval process and get a realistic budget. Now, it’s time to meet with the realtor.
Working with a realtor they look at a few different houses (castles) and settle on a winner. They find their future home and make an offer that is accepted. After the accepted offer they come back to their mortgage person, who they have been in close contact with, and start working on getting that final approval. This takes about 30 - 45 days. Their mortgage person reminds them to have funds ready for the closing day by liquidating any investments and transferring money to their bank account, which can take time. On closing day, Cyn and Astro met with the title company and the parties involved to finish everything up. Look at that. A happy ending to the story where our couple moved into their very first castle. The process may seem intimidating at first, but you have lots of people helping along the way.
Tips for First Time Homebuyers
For this article, I interviewed Brad Sailing – a mortgage loan officer who said he would deny everything. He has 20+ years of experience lending in Wisconsin. Here are a few of the important takeaways he had for a first-time homebuyer in the current housing market.
Start with a pre-qualification session with a mortgage loan officer. You might be closer than you think to buying a home. Stay in contact with them throughout the process.
Save a little extra on top of that down payment for emergencies or to possibly buy your rate down if you go with a 30-year.
Be open to an ARM (adjustable rate mortgage) loan to start building equity, take advantage of lower rates, and avoid private mortgage insurance. Most people do not keep their initial mortgage loan longer than the first 5-7 years as it is.
Rates are higher now than during the pandemic, but it is still a historically decent time to buy a home. You can always refinance at a lower rate later.
If you end up looking to do a “house hack” where you buy a duplex and rent out the other side, then be aware that these types of investment properties may require between 15% - 25% down payment.
Become a Dragon Money Investor
Most people see their home as their biggest investment, but did you know that you can also invest in Dragon Money? I’m putting lots of time into writing these articles to help people improve their personal finances. Please consider donating!
