Photo by Worawee Meepian from Getty Images via Canva.com
In this article:
Many home-buying reality TV shows feature a predictable scenario where a couple falls in love with a property, only for the real estate agent to reveal that the house is well beyond their budget. Initially, this seems entertaining, but it serves as a stark reminder that the dream home doesn’t always align with financial reality.
While these shows illustrate the contrast between aspiration and budget, there are more effective ways to avoid such disappointments in real life. Homebuyers can take proactive steps to assess their budget before falling for a property that’s out of reach.
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 about renting or buying a home, it’s helpful to learn the amount of financing you qualify for. To do this, you’ll need to determine your mortgage pre-qualification amount. This is the loan amount you're eligible for, which a lender estimates based on your self-reported answers. A pre-qualification doesn’t scrutinize your finances like a pre-approval, which we’ll discuss below.
After reviewing your results and talking with a loan specialist, the initial numbers might not add up to meet your home buying budget expectations. Another scenario that could affect your buying power is that the interest rates are higher than you anticipated.
Before moving on, this is the time to regroup and evaluate your finances to see if there's room for improvement. 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 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.
After researching home prices, an initial search in your chosen area might give you pause. For example, 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 evaluate other choices. A fixer-upper, a condo, a townhouse, or even a duplex might be an affordable option.
Photo by Comstock Images from Photo Images via Canva.com
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 a 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 reorder these in importance or scrap one or two altogether. And if your finances just aren’t ready, make this an opportunity to save for a bigger down payment to help make your dream home a reality next time.
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 such as a military PCS move which could cause a change in spouse employment.
During a pre-approval process, it’s not the time to buy out-of-the-ordinary, expensive 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 afford a new monthly payment toward your home. The fancy furniture you’ve dreamed 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 plan 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.
Factor in closing costs, including 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 tax estimates, but your real estate agent or local tax office will. Most home listings also provide tax amounts, and you can generally find the tax rate for most properties through the online portals for county tax offices.
back to top
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 will finally 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 cater to future renters looks much different than a plan to outfit your post-military life forever house.
Did you know 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 the 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 devised a plan to buy a home in a neighborhood we typically couldn’t afford.
The neighborhood has great sidewalks for stroller pushing, bike lanes leading 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 primary 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.
Strategies to Start Creating Your Dream Home
Often, the price tag on the house we can afford doesn’t 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, it's that I know I can fix the imperfections, and I can do it within a budget, too. While contemplating future renovations, consider quick fixes that bring joy into the home. 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 cleanup. Power-wash the exterior, remove yard debris, and tidy bushes and tree limbs.
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 bit of work, effort, and imagination, you can create a home perfect for your family that won’t send you into financial ruin.
By Dawn M. Smith
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.
back to top