How to Buy a Home on a Budget in an Expensive Market

Housing-Market-Budget

If you feel like you’ll never own a home in a market that’s only getting more expensive, you’re not alone. A 2018 NAR survey found that 63 percent of respondents believe home prices went up in their region in the last year. What’s more, these prices are expected to rise 4.3 percent in 2018, which means your current predicament may not be going away any time soon.

While the possibility of buying a home may seem grim, there’s still hope. Use the following ideas to find a home you’ll love, even in an expensive market, while sticking to your budget.

Look—for A While

Most homes may be expensive in your market, but most doesn’t mean all. If you’re new to looking at home prices in your area, start slow and take your time browsing from a distance. Use an app like Homesnap or Zillow to browse what’s available in your area on a regular basis. Slowly, you’ll get a feel for average prices in various neighborhoods.

For example, in San Diego, homes in Normal Heights, La Mesa and Talmadge tend to be less expensive because these neighborhoods are on the outskirts of popular areas like North Park, Balboa Park and Downtown San Diego. You likely wouldn’t know that until you started browsing various areas around the city.

In addition to looking at houses and taking stock of the market, do some research. Check out the Recently Sold tool from Zillow to see what homes are selling for, rather than just looking at listing prices. You can also uncover home price trends with Redfin’s Median Sale Price tool. When you start looking more seriously, you’ll know where to focus your attention.

You can also use this time to see just how much money you have lying around in your budget for your future home. You can get pre-approved for a mortgage to get an idea of what kind of financing you could receive, but most importantly you should decide how much you have in your budget for a home, so you’re not buying the maximum of what you can afford.

Homeownership also comes with a lot of extra costs that renting doesn’t. You won’t just be adding a mortgage payment but also insurance, maintenance, emergency repairs, and whatever else needs paid for on a regular basis.

Explore the Costs and Benefits of PMI

The same 2018 NAR survey found that 47 percent of respondents can’t save for a down payment because of limited income. Another 30 percent can’t because of student loan debt and 28 percent because of rising rental costs. If you’re struggling to save for a down payment, consider Private Mortgage Insurance (PMI). For those of us who can’t cough up 20 percent for a downpayment, which for a $400K home is $80K, this is what makes home buying possible.

With PMI, you can put down as little as 3 percent. In the same scenario from above, that means you’d only need to front $12K, a drastically lower amount. The reason this works is because you then pay for Private Mortgage Insurance as part of your regular mortgage. This is the way lenders protect themselves, and the goods news is that the monthly cost is minimal: just .5 to 1.5 percent of the total cost of your home annually, according to Pros and Cons of PMI.

Continuing the same scenario, that means your down payment is $12K and your annual PMI would be about $330 monthly, if the rate was set at 1 percent. Once you have 20 percent equity in the home, whether through home renovations or making your PMI payments, the fee drops off and you’re left with just a regular mortgage. For those who are making a steady monthly income, this added cost may be a small price to pay for getting into an expensive home on a budget.

The flip side of PMI is that you want to get to that 20 percent equity point as quickly as possible. Paying 1.5 percent for too long will cost you more than saving up for a down payment in the first place. Hopefully your house continues to appreciate so paying down your mortgage and a higher appraisal value will remove the need for PMI before too long.

Be Open to Buying an Investment Property

You may think you need to flip houses or buy a bunch of properties if you want to invest. While those are two ways to get into property investment, the process doesn’t have to be so formal—and the house may not even be an “investment property” for a few years.

The idea is simple: you get into to a less expensive home now, one that may not be your dream home. With this property, you get rid of paying rent, and get into a home, like you want. Then, after a few years of saving for a larger down payment, and can afford the mortgage for a more expensive home, you keep the property as a rental, and purchase the home you’ve always wanted.

In this scenario, you end up in your dream home, and bonus, you’ll have a source of somewhat passive income thanks to rental payments from your tenants.

Look for Condos

Condos are often less expensive than a detached home. While they’re less desirable, they’re often more affordable in expensive markets because houses tend to appreciate faster, suggests U.S. News. For small families or buyers with no children, condos make it possible to get out of renting and into owning in an expensive market.

However, cost may be one of the few benefits. There’s one costly drawback to owning a condo: expensive HOA fees, which are on the rise, according to Trulia research. Trulia explains why we’re seeing this trend:

“A big part of [why HOA fees are on the rise] is simple: homes are getting older. The average age of buildings occupied by homeowner households (36-years-old in 2005 and 41-years-old in 2015) was estimated using the same census data. Older buildings tend to require higher HOA fees, and the aging of the HOA housing stock may explain the steady increase in HOA fees even throughout the crisis.”

Your HOA fee pays for various services and upkeep of amenities within your community, from pool cleaning to updates around the property. While this likely means less work falls on your shoulders, it also adds to your monthly costs. These fees are paid in addition to standard mortgage payments, consider your monthly income and bills before getting into a condo.

Become a Homeowner in an Expensive Market

You can buy a home, on a budget, in an expensive market. You just have to know what your options are, get a feel for the area, and find creative solutions, like using PMI to your advantage. While you may not be able to find your dream home right now, you could get out of renting if you were willing to compromise for the time being if  you buy a condo or go the “investment property” route.

Just remember, your hopes of being a homeowner are not dashed. Get ready to start looking and you’ll be in a budget-friendly home before you know it.

Jessica Thiefels has been writing for more than 10 years and is currently a full-time writer, consultant and business owner. She and her husband recently paid off $20K in debt in just one year, and her work as been featured in financial publications like Market Watch, SoFi and more. Follow her on Twitter @Jlsander07 and connect on LinkedIn.