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During the second quarter of 2022, home buying became 15% more expensive nationwide. According to the National Association of REALTORS®, the qualifying income for a median-priced home increased from $90,000 to $104,000, making June’s housing affordability the lowest since June 1989.
There may be some light at the end of the tunnel. Inflation seems to have reached its peak, stopping the rapid increase of mortgage interest rates, which are now hovering slightly above 5% for a 30-year fixed-rate mortgage.
However, the National Association of REALTORS says that a typical home purchase is unaffordable for the average first-time buyer, who often spends 25.6% of their family income on mortgage payments (principal and interest). However, a mortgage is considered affordable if the monthly payment is 25% or less of the household’s income.
If you’re looking to buy a house, there are steps you can take to potentially lower your monthly mortgage bill. Here are five tips to get your mortgage payment as low as possible.
1. Start Saving Liquid Assets (Cash)
To prepare for a home purchase, you should start setting aside cash to make as large of a down payment as you’re comfortably able to afford. Ideally, your down payment should be 20% of the home’s purchase price to avoid paying private mortgage insurance (PMI), but it can be as low as 3% for conventional mortgages.
Worth reading next: How It’s Possible To Buy a Home With Less Than 20% Down
2. Improve Your Credit Score to Unlock Lower Rates
A higher credit score means a lower interest rate which can equal big savings on your monthly mortgage payments and huge savings in interest over a 30-year home loan.
To help increase your credit score, start by checking your credit report and disputing any errors, paying all credit card bills on time, and paying down any outstanding debt. You can also ask for higher credit limits to lower your overall credit utilization or become an authorized user on the card of a relative or friend with a good history of on-time payments, as that may reflect positively on your credit score.
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3. Buy a Cheaper (or Smaller) House
When hunting for a house, going with a less expensive option means taking out a smaller mortgage. It may not be your perfect home, but it could be enough to make homeownership more affordable. A larger house also means more upkeep, cleaning, and more or larger cost for repairs and maintenance, and higher insurance as well.
Larger homes also may tempt you to fill all that space with things you may not really need. So buying as small as you need or can comfortably live in is a great way to lower the cost of a home purchase.
4. Looks at Loan Options that Require Very Little Down
There are other options besides a conventional mortgage, such as government-backed mortgage loans. For example, if you are a veteran, service member, or a surviving military spouse, you may qualify for a VA loan through the U.S. Department of Veterans Affairs. VA loans usually require no down payment, may have relaxed credit score requirements, and do not include private mortgage insurance while offering competitive interest rates. But be aware of any associated fees and consult your financial or mortgage expert first.
An FHA “loan” is a strong option for first-time home buyers and can require a much lower down-payment. While not a direct loan from the government, the Federal Housing Administration loan is a type of government-backed mortgage loan that may have “easier” financial requirements, like a minimum FHA loan down payment between 3.5 percent and 0 percent, depending on your credit score –which is far less than the standard 20% with standard bank loans.
You may also qualify for an FHA loan if you have debt or a lower credit score. You might even be able to get an FHA loan with a bankruptcy or other financial issue on your record but always check first with a mortgage loan expert or book time to talk to a housing counselor via the FHA website to be sure and learn more about loan requirements to qualify.
Worth reading next: 10 Hidden Costs That First-Time Homebuyers Should Know
5. Check Out Alternate First-Time Buyer Programs
If you’re a first-time home buyer, you may qualify for grants, loans, and other financial help, which can help with the down payment and closing costs, and provide tax credits. Help can be found through your local or state government, the federal government, as well as charities, nonprofits, and employer programs.
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