You might be thinking that buying your dream home is out of the question. Maybe the down payment shock has you cowering in fear or your debt to income (DTI) ratio is a bit lopsided or you and your partner have seriously different ideas on the ideal place to settle OR you’re waiting for your dream partner before you settle into that dream home. Whatever is holding you back, the truth is, you’ve got options! Just know that the sooner you start planning, the better your chances are.
Reality Check Your Dream House
Sorry we’ve got to start by keeping it real. We are all about having dreams, but let’s pull our head out of the clouds for this exercise.
Chances are that IF you’re reading this you already have something in mind for your dream house. Maybe an app on your phone where you’ve saved a few dozen homes that you’ve already imagined yourself in…having a relaxing morning scone in that breakfast nook. Yes thought so. Now do the following:
- Take 20% of the average price point of those dream houses you’ve been saving on your app.
- Now take 80% of that same dream house price point and plug that amount into a mortgage calculator using today’s 30 year fixed interest rate. Multiple the monthly payment by 3x. We can help with this part.
- If your dream house still requires some TLC, put some extra aside for maintenance projects
If you don’t have anywhere near the 20% down payment or the amount needed for the monthly payment – keeping in mind that you should only be spending 28% of your gross income on housing expenses – then the short answer is no. You are not ready at this moment to pull the trigger on that dream house.
BUT THAT’S OK. Dreams aren’t meant to be easily achievable. Otherwise they wouldn’t be dreams. Pep talk over. Skip down to the next section where we talk about your options.
However, if you are able to afford either the down payment and/or the monthly payment, then here’s the plan:
- DON’T mention it to your friends because they may start to resent you
- DO talk to a real estate agent or contact an expert lender (well didn’t you come to the right place) to see what you need to do to make this happen.
The general rule of thumb is that housing expenses (aka monthly mortgage principle, interest, taxes, and insurance aka PITI) should be no more than 28% of your gross income.
Now that you’re armed with this intel let’s start chasing your dreams.
Options for Making Your Dream Home a Reality
Here are a few solid paths to getting your dream home:
- If you survived our little math exercise above and found out that you have the down payment and income needed to responsibly buy your dream house, then huzzah! Your dreams are about to come true. Just call us and we’ll start putting together a dream loan for your dream home.
- Not there quite yet? Consider renting a home for a bit while boosting your savings and paying down any debt you may have. You may think you’re really far off from landing your dream house, but before you give up all hope, know that there’s a lot of flexibility in financing properties nowadays. For example the 20% down payment that we scared you with earlier is an outdated requirement. Sure we always still start the conversation with 20% down, but because that’s usually where the mortgage terms are most favorable, but you can get away with much less down…and that’s good to know even if you learn the 20% down payment still makes the most sense.
- Ok now we get creative: consider buying a starter home. A “starter home” is exactly what it sounds like – the first home that you’ll live in for a few years while you add to your savings, decrease your debt, and build equity in your current home to put toward your dream home. Now, buying a starter home doesn’t mean you are lowering all of your standards. Think long term because even if you are treating it as a stepping stone, you may decide to hang on to it as a rental property even after you get that Barbie Dream House (sorry Kens). Love that starter home, enjoy that starter home, and treat it like a home that someone else may one day fall in love with. Who knows, maybe your starter home is someone else’s dream home.
- Here’s the Macgyver option. If you’re on the brink of affording either the starter home or dream home, add a roommate to help cover the monthly costs. We’re all about having someone else pay your mortgage and over time your situation may improve so you can cover the costs without the roomie. If you want to put your real estate entrepreneur hat on, you can make the starter home a duplex and rent out the other unit to someone. This kind of passive income compounds as property values increase and opens up tons of opportunities down the line, not to mention tax benefits.
Remember, there is no definite right or wrong answer to the starter home vs dream home decision…just like some super weird person once said “there are many ways to skin a cat”.
Just like any life altering decision, this one requires weighing the pros and cons while taking a close look at your unique circumstances.
If you need help weighing the options further, head over to our Mortgage FAQs and Financing Resources page. We have a plethora of articles and fast facts on mortgages, including what different types of mortgage loans are available, including advice for couples that are planning to buy a home and get married, and first time home buyer FAQs. And of course, you can always speak to our team here – friendly finance advice with no commitments and absolutely no cat skinning!