I don’t know about you, but I really despise watching the home buying shows that begin with a real estate agent taking a couple to their dream home. You know what happens next, and it isn’t pretty.
The agent highlights everything in the home that nests well with their home buying wish list, and the couple swoons. "The house is perfect!" they declare excitedly, only to have the smug agent (and if you watch any of these shows, you know who I’m talking about) announce that the home is twice their budget. Cringe.
At first, I enjoyed watching these scenarios play out. The predictable element of comedy arrives on cue at the point where the couple had fallen in love with the home. As they’re fantasizing about hosting parties in the spacious, open plan kitchen-dining-living area, and identifying which room each of their children will occupy, the real estate agent cruelly dashes their dreams. It’s like watching someone hold out a piece of candy to a small child, and just when the child almost has it in his grasp, the mean person snatches it back and shoves it in his own mouth.
This type of humor gets old after a while. It’s effective in that it does help the couple quickly realize that their home buying dream doesn’t match their budget reality, but there are less painful ways for the rest of us to realize this without having the whole world watch as a real estate agent delivers the soul crushing news: You can’t afford it.
To avoid this painful scenario, you can take several steps to learn how to balance your home buying dream against your budget reality.
1. Get a Loan Pre-Qualification
If you’re on the fence with the decision to rent or buy or a home, it’s good to find out the amount of financing you could potentially qualify for. To do this, you’ll want to determine your pre-qualification amount. This is a loan amount that a lender estimates based on your self-reported answers. If you want to get a quick estimate, check out MilitaryByOwner partner Veterans United to complete their two minute pre-qualification quiz.
2. Keep an Open Mind
Once you have your pre-qualification amount, you can then perform a quick search in your dream area to get a rough idea of what types of homes you may qualify for. You may not know what your dream area is, but by using MilitaryByOwner’s search functions, you can at least look in the areas located closest to your duty station or the base where you’d like to live near if this if your retirement station. This will help you better determine whether buying a home is a reality for you right now.
While your pre-qualification amount may buy you a beautiful home with a pool in a gated community in Florida, the same amount may only purchase a one-bedroom condo in an older building near the Pentagon. If that’s the case, don’t despair; use this PCS as an opportunity to save for a bigger down payment to help make your dream home a reality next time around.
3. Obtain Mortgage Pre-Approval
If your pre-qualification amount entices you to pursue home buying further, then it’s time to get a mortgage pre-approval. Pre-approval will give you a more accurate estimate than a pre-qualification because it takes additional factors into account such as your debt-to-income ratio, credit rating, debt worthiness, and any potential implications that your PCS may have for your impending move, such as a change in spouse employment.
4. Budget for Closing Costs and Taxes
Aim for homes 10% below your target amount. Though you may have received a pre-approval of $200,000, if you’re planning to finance the entire amount with a zero down payment VA Home Loan as most military families do, then you’ll need to set your home shopping target below that amount. Factor in closing costs to include an escrow amount of upfront homeowners insurance and upfront tax payments. Your lender will provide you with a breakdown of the closing costs once you submit your purchase contract, but don’t hesitate to ask for estimates based on your specific housing budget in advance to help make sure that you’re shopping for a home within your budget. If you’re using a VA or FHA loan, you’ll have pretty fixed closing costs; make sure to double check with the VA that these closing costs are all allowable.
The lender won’t be able to provide you with estimates for taxes, but your real estate agent or local tax office will. Most of the listings do provide taxes, too, and you can generally find the tax rate for most properties through the online portals for county tax offices.
5. Plan to Create Wealth in Your Home
Though I may not like the television agents who dash their client’s dreams of walking into perfection, I can appreciate their intent and their lessons. With a little work, effort, and imagination, you can create a home that’s perfect for your family without sending your family into financial ruin. Keep in mind that location can’t be updated (unless you’re buying a tiny or mobile home, but then we’re discussing a complete different budget reality), so find a neighborhood that you love, a layout that you can work with, and look past the outdated elements of the home.
We recently had to balance our home buying dream with our military family’s budget, but it worked out well because we came up with a plan to buy a home in a neighborhood we otherwise couldn’t afford. With a little imagination and effort, we can create some wealth in the property. The neighborhood has great sidewalks for stroller pushing, bike lanes that lead out to scenic country roads, top-notch schools, and easy access to good shopping. The house has a peaceful back yard, a covered patio, and an ideal layout for future renting or resale.
We got the house for a bargain. Why? The cabinets are hideous, and someone left the master bathroom behind in the early 90s, which is strange since the house wasn’t even built then. The house sat on the market for longer than the area average because all of the other homes for sale in the neighborhood and surrounding neighborhoods had updated cabinets and bathrooms. If spending way too much time watching HGTV has taught me anything, I know I can fix those, and I can do it within a budget, too. For now, cute towels, mats, and seasonal decor will have to make do, but just give me a few months!
Being able to define what you "must-have" in a home from traits you’d like to have will help you prioritize your needs when looking for your next home.
By Karina Gafford, updated 2018 by Mary Ann Eckberg.