Purchasing your family’s dream home is stressful. You add kids and an already tight budget to the mix and it can be downright unbearable. The good news is: it doesn’t have to be. There are many ways to make the process of homebuying budget-friendly.
Use these pro tips and tricks to find your family’s dream home and stay within budget.
Know What You Can Afford
As a growing and busy family, you have a lot of expenses and a tight budget. While there’s likely some wiggle room, you don’t want to get your heart set on a house that leaves you “house poor.”
Before looking, when the kids will inevitably get excited about that pool in the backyard or a private space for them and their friends in the basement, decide what you can afford. Money Under 30 makes this math easy, breaking it down into three rules:
- Rule of 28: Your mortgage payment should not exceed 28 percent of your gross monthly income.
- Rule of 32: Housing payments should not exceed 32 percent of your gross monthly income.
- Rule of 40: Your debt payments (including the new housing payment) should not exceed 40 percent of your gross monthly income.
When you are clear on what you can afford, you can look at homes that are within reach.
Diversify Your Options
You want the best for your family, so the newest home, in the brightest neighborhood, with the best schools is the first place you look. While this is the ideal, your dream home can still be a “dream” without checking every box.
For example, your dream home may not look like your dream home just yet, because it’s old and needs some work, but it’s in the best neighborhood with a great school district. This is one way to find your dream home without the cost:
“Most new construction homes could cost you up to 20 percent more than a comparable older house. Buying an older home could add up to big savings and allow you to get a bigger piece of the “dream” than a brand new one,” suggest experts from Trulia.
If having a new house is most important, and the neighborhood or school district less so, then consider how you can diversify your search in that way.
Plan for Plan B
Let’s face it; life happens, especially with kids. It’s important to create some wiggle room in your budget to protect yourself from life’s unexpected moments. For example, are you considering having more children? Thinking about getting a pet? These and other unexpected costs, like medical bills or a new appliance, can put you over the edge and will likely occur in some form or another.
As such, you need to plan for Plan B, and leave wiggle room in the budget. To do so, Crystal Paine, from Money Savings Mom, suggests padding your budget categories based on what you anticipate you’ll need. For example, home repairs versus extracurricular commitments:
“We put extra money aside in a number of our budget categories each month—money for medical expenses that may be coming, money for home repairs that may need to happen, money for car repairs that will likely be needed. Each month, if we don’t need this extra money, we just keep setting it aside and building up a reserve. This way, when the ‘unexpected’ expenses pop up, we’ve already planned ahead for them.”
Consider Private Mortgage Insurance (PMI):
Being on a budget doesn’t mean you can’t find your dream home. One great way to get the house you want, but don’t have enough saved for, is private mortgage insurance (PMI). Traditionally, home buyers will put down 20 percent of the home’s value as their deposit.
With a tight budget, however, you might not be able to put down such a hefty down amount. In that case, you can use PMI, putting down just 5 or even 3 percent as your deposit. Why is this possible?
“PMI is designed to protect the lender who underwrote your mortgage. It protects them in case you default on the loan and fail to pay the remaining balance and interest fees,” according to the guide, Pros and Cons of PMI Insurance.
The catch with PMI is that you’re paying extra each month, and this payment will vary depending on the cost of the home. In many cases, the payment is still low enough to justify. For example, the same PMI guide explains, “The cost can range anywhere from half a percent to 1.5 percent of your loan amount annually. If you borrowed $300,000 for your mortgage and your PMI amounts to 1 percent of that, you’ll pay $3,000 a year for the premiums—or $250 per month.”
The good news is, once your loan-to-value on the house drops to 80 percent, the PMI drops as well. This can come in the form of equity in the house, like adding a new bedroom and then re-appraising, or simply paying down the loan. While PMI may not be the best option for everyone, it’s an important one to consider when you’re looking for your dream home on a budget.
The best home for your tight budget is likely not going to come out of nowhere. You need to be vigilant to find it, and there are a few ways to step up the search process to increase your chances:
- Look at a lot of houses. The more you see, the better your odds for finding one within your budget.
- Look for an agent who’s not afraid to confidently negotiate. This can be the difference between paying full price and getting the sellers to come down by $10K or even $20K.
- Make a lot of offers. “Many real estate investors abide by the 100-10-1 rule, which says you should look at 100 houses, offer on 10, and get just one accepted. By submitting a lot of offers, assuming most of them will fall through, you increase your odds of getting a really great deal on a cheap house,” suggests Brandon Turner, real estate investor.
If you’re ready to buy, but you’re still on a tight budget, don’t stress. Get your finances in order, be vigilant when you’re ready to look, and remember: your dream home may not check every box right away, but that doesn’t mean you can’t get it there.
About Jessica Thiefels
Jessica has been writing for more than 10 years and is currently a full-time writer. She’s written for Reader’s Digest, AARP, Lifehack and more. Follow her on Twitter @Jlsander07 and connect LinkedIn.