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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. The agent highlights everything in the house that nests well with their home buying wish list and the couple swoons.
"The house is perfect!" they declare excitedly, only to have the agent 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 when the couple has 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 makes them realize that their budget and their dreams are not aligned.
The message is effective in helping the couple quickly realize that their home buying dream doesn’t match their budget reality. Thankfully, there are less painful ways for the rest of us to discover this truth as a real estate agent delivers the soul-crushing news: You can’t afford it.
To avoid this painful scenario, take steps now 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 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.
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After reviewing your results and talking with a VA loan specialist, the initial numbers might not add up to meet your home buying budget expectations. Or, the interest rates that were ball-parked may be higher than you anticipated.
Before moving on, this is the time to regroup and re-evaluate your finances to see if there's room for improvements. Was there a problem with your credit score? Or with your debt-to-income ratio? These factors contribute to the ability to attract favorable loan terms. Later, you’ll be asked to obtain a mortgage pre-approval, which is a more in-depth investigation of the health of your finances used by the loan officer to factor the loan terms.
2) Keep an Open Mind: You Might Need to Compromise
Once you have your pre-qualification amount, you can perform a quick home search within your preferred neighborhoods to get a rough idea of what types of homes you may qualify for. The options might not be what you first envisioned.
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An initial search in your chosen area might give you pause after checking out the actual home prices listed. 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.
Don’t be discouraged, but think for a moment—do you love the neighborhood enough to consider out-of-the-box alternatives? If a move-in-ready, single family home is out of reach, stop to scrutinize other choices. A fixer-upper, a condo, a townhouse, or even a duplex might be an affordable option.
Another solution is to reconsider your priorities. It’s common for military homebuyers to seek homes with these qualities:
- A quick commute
- Access to quality education
- Budget-friendly purchase
- Size of the home
- Amenities such as chef’s kitchen or wrap-around porch
- Move-in ready condition
The reality is that, to meet viable expectations—especially in a sellers market, you’ll have to re-order these in importance or scrap one or two altogether. Or, use this PCS as an opportunity to save for a bigger down payment to help make your dream home a reality next time around.
Ready to buy a home? Even if you’re not a homeowner yet, the time is now to begin planning your finances and saving for your home purchase.
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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. A pre-approval presents 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.
During a pre-approval process, it is not the time to buy out of the ordinary purchases (such as a car) or to charge abnormally large amounts on your credit card. These purchases affect your home buying power. Mortgage providers want to feel confident in your ability to easily afford a new monthly payment toward your home. The fancy furniture you’ve been dreaming of for your new home will have to wait!
4) Budget for Closing Costs and Taxes
Aim for homes priced at 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, you’ll need to set your home shopping target below that amount.
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Factor in closing costs to include an escrow amount of upfront homeowners insurance and 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; 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 home 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
Renovating and decorating a new home is very exciting! All the plans you’ve made over the last few years are finally going to come together. Go for it, for sure, but take this bit of advice: make these changes with your future in mind because the cost of the improvements might not pay off if you’re leaving soon. A decorating plan to sell quickly or to cater toward future renters looks much different than a plan to outfit your post-military life, forever house.
Did you know that some home improvements have a significantly better ROI than others? Here’s what you need to know when planning the changes: Which Home Renovations Are Worth Your Time and Money?
Keep in mind that location can’t be updated, so find a neighborhood you love, a layout that you can work with, and look past the home’s outdated elements.
How to Balance Your Home Buying Dream with a Military Family Budget
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 typically couldn’t afford.
The neighborhood has great sidewalks for stroller-pushing, bike lanes that lead out to scenic country roads, top-notch schools, and easy access to shopping. The house has a peaceful backyard, 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. The house sat on the market for longer than the area average because the other homes for sale in the neighborhood and surrounding neighborhoods had updated cabinets and bathrooms.
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Strategies to Start Creating Your Dream Home
Let’s be honest. Often, the price tag on the house we can afford does not correlate with the pretty interiors or curb appeal we’ve pictured in our minds. Realizing this disconnect is when the DIY, can-do spirit kicks in!
If spending way too much time watching HGTV has taught me anything, I know I can fix the imperfections, and I can do it within a budget, too. While you’re contemplating future renovations, bring joy into the home with quick fixes. The updates can be as simple as a paint redo or an affordable flooring option.
Check out these easy and inexpensive options to put your personal touch on a property:
- Add new linens in the bathroom and kitchen; colorful rugs work every time.
- Seasonal decor boosts a festive atmosphere.
- Reimagine your traditional furniture function; turn that dresser into a bathroom vanity!
- Choose a wall accent, like beadboard or shiplap.
- Take on a front porch makeover with new address numbers, mailbox, door paint, and potted plants.
- Accentuate curb appeal with a complete clean up. Power wash the exterior, remove yard debris, and tidy bushes and tree limbs.
As you can see, with a bit of imagination and effort, I can create some wealth in the property that will serve me well in the future.
Though I may not like the television agents who dash their clients’ dreams of walking into perfection, I can appreciate their intent and 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.
By Dawn M. Smith with Karina Gafford
Ready to buy a home? Even if you’re not a homeowner yet, the time is now to begin planning your finances and saving for your home purchase. Learn more in our free ebook below.
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