6 Ways You Can Afford to Buy a House

The price of a house can be intimidating, especially to first-time homebuyers. Rather than thinking, there’s no way you can afford a home, however, you should be aware that there are many factors in your control that can help you swing such a big purchase.

Some might require advanced preparation, such as saving and improving your creditworthiness, but in other cases, you just need to be open to more options. Keeping this in mind, here are six ways to afford your new home.

1. Find a down payment

The more you contribute to the purchase of your home, the smaller your monthly mortgage payment. If you’re able to come up with 20 percent of the purchase price, you’ll also avoid private mortgage insurance that can add to the monthly cost.

Before you begin your house hunt, add up what you have for a down payment, including a job bonus, your tax refund, savings and gifts from family. If you don’t have a lot (or even anything) for a down payment, don’t fret. Some homebuyers can qualify for no or low down payment options from the Veterans Administration, Agriculture Department, and more.

2. Reduce your DTI

A key factor when it comes to qualifying for a mortgage—and affording your home—is the debt-to-income ratio (DTI). Lenders add up your monthly debt payments, including your future mortgage payment, and calculate how much that makes up of your monthly gross income. The higher the ratio, the riskier the borrower.

If your DTI is too high, you might not qualify at all. Every lender sets its own DTI requirement. If your DTI is getting close to the edge, you should try and reduce your monthly debt obligations by refinancing car loans and consolidating other debts to lower monthly payments. As for credit card debt, be sure to pay off debts that have the lowest balances and highest monthly payments to immediately reduce your DTI.

3. Work on improving your credit score

Lenders give lower mortgage rates to borrowers with higher credit scores, which means you’ll pay less interest during the life of the loan. Your monthly payment also will be smaller. Similarly, your credit score affects the premium you pay for private mortgage insurance (or PMI), which is required if you put down less than 20 percent of the purchase price as mentioned previously.

The quickest way to improve your credit score: Set up automatic bill payments so you’re never late; reduce or eliminate the balances on your credit cards to 30 percent or less of the credit lines; and get rid of any errors on your credit report.

4. Explore all loans

Rather than fixating on a specific mortgage loan program, instead ask a professional mortgage broker about all the options available to you before you even start your search. In fact, it might not be a bad idea to know you qualify for more than one mortgage as you shop around.

5. Adjust expectations

The home you can afford may not be one that checks all the boxes, especially if you’re a first-time buyer in a market with limited entry-level homes. That’s why it’s smart to prioritize your absolute must-haves from the things you would like to have.

6. Buydown the interest rate

Another way to lower your mortgage rate—and reduce your monthly payment—is to buy down the rate. You can do a permanent buy-down, where the lower interest rate lasts the life of the loan, or you can do a temporary buy-down where the lower rates last a couple of years. Both require upfront payments at closing. In some cases, the seller will pay for the buy-down as a concession.