Budgets: They reflect a reality that we either revel in or despise. If yours is reflecting the fact that, yes, you can afford to make a mortgage payment every month, but it will be tight, you have some tough decisions to make.
These include the obvious, such as putting off the purchase until you have more income or savings or buying the least expensive home you can find. Let’s take a look at some of the less-obvious ways to take the money you have right now and stretch it to make the purchase a bit more comfortable.
Pay more now to save later
Whether you know it as PMI (private mortgage insurance) or MIP (the FHA Mortgage Insurance Premium), it’s a monthly payment that you would be wise to try to avoid.
Required on all mortgages for which the borrower makes a down payment of less than 20 percent, PMI can add a big chunk to your house payment. We’ll use the median home price nationwide for the following scenario.
For example, if you use a 30-year, FHA-backed loan at 3.750 percent interest to purchase a home for $250,000, and offer a down payment of $8,750, your MIP will be about $170.00.
Take the time to save more money so that you can pay a 20 percent down payment, and you’ll skip that MIP or PMI fee every month. We don’t know about you, but we can put that $2,040 per year savings to much better use than handing it over to the lender.
But here’s the really exciting part: With a 20 percent down payment, you not only ditch the mortgage insurance requirement but, because the loan amount is smaller, your monthly payment will be significantly less as well. In our scenario, in fact, you’ll save nearly $500 per month on your house payment.
Now THAT’S using your ‘noggin!
Ok, we hear you – who wants to wait as long as it will take to save all that money? Is there someone that will gift you the funds for the down payment?
While FHA mandates that the borrower kick down at least 3.5 percent of the down payment, conventional loan guidelines permit gift funds for all or part of the down payment, as long as the loan-to-value will be 80 percent or less (meaning you’ll need a 20 percent down payment). Or, they can be used for closing costs and other items.
The donor has to be related to you, however, or a domestic partner, fiancée or fiancé.
Build sweat equity
Ok, so not all of us can come up with a $50,000 down payment for a $250,000 mortgage. For those on a limited budget with sparse savings, buying a fixer home may be the answer. Nationwide, fixers are priced an average of 8 percent less than market value, according to a Zillow analysis.
The drawback to buying a home that needs work is that, since you have a tight budget, the renovation work will be piecemeal, on an as-you-can-afford-to-make-repairs basis. Some buyers aren’t bothered by this prospect, especially if there isn’t a lot of work to be performed.
If you are among them, fixers are the ideal way to get into homeownership for a lot less money than you’d pay for a turnkey home. Eventually, you will have a home that’s customized to your lifestyle and tastes.
All those nickels and dimes add up
There are several “legs” to your monthly mortgage payment and a big chunk of it goes into an escrow fund to pay for your insurance and taxes and, sometimes, your homeowner association dues and fees.
In fact, if you’re an “average” American, and you live in a managed community, your HOA fees, taxes and insurance add nearly $600 to your house payment each month. Thankfully there are ways to cut that number and stretch your home-buying dollars.
HOA fees are on the rise, nationwide. In a recent Trulia study, these fees outpaced home-price growth and now average $331 a month. If you don’t mind doing your own exterior home maintenance, seek out a home that isn’t in a managed community. Your mortgage payment will be a lot easier to swallow if it’s more than $300 a month lighter.
Next, consider homeowner insurance. The average annual premium, nationwide, is $964, according to Value Penguin. The Insurance Information Institute offers several ideas on how to whittle down the cost of insurance.
In a nutshell, you can ask for a higher deductible, install security features and take advantage of discounts, such as those for seniors. Shop carefully and compare policies among several insurers.
Wallet Hub’s John S Kiernan claims that “The average American household spends $2,149 on property taxes.” That’s a smidge more than $179 per month.
Interestingly, few homebuyers research a home’s property taxes before deciding to purchase. It’s easy to do – many assessor’s offices have tax information online.
“Buyers also should find out whether a home may be subject to multiple property tax authorities. Not only states, but also counties, cities and special districts, such as local water, sewer or school authorities, may wield such powers,” according to bankrate.com’s Marcie Geffner.
While a tight budget doesn’t preclude one from buying a home, finding ways to stretch what little money you have may just allow you to purchase more home than you thought possible. At the very least, taking cost-saving measures will help lower your monthly payment.