How to Buy a Home on a Budget

When one shops on a budget, the shopping list doesn’t typically include a home. But just because resources may be limited doesn’t mean homebuying should be unachievable.

The path to homeownership is not without financial challenges. Down payments, closing costs, and monthly mortgage payments are enough to make any homebuyer think twice, regardless of how padded their savings account is.

But for aspiring homeowners who are willing to take the necessary steps to prepare themselves for the big purchase, a careful plan and key resources can make buying a home on a budget a possibility.

Below, the team from Prevu Real Estate will guide buyers through essential steps on how to buy a home on a budget, from understanding your financial health and jumpstarting your savings early to leveraging commission rebates to save money when you buy.  

Buying a home on a budget

• Get your finances in order
• Save early
• Improve your credit score
• Use commission rebates for extra savings
• Explore multiple mortgage options
• The importance of a pre-approval
• Negotiate closing costs
• Consider a fixer-upper or starter home

Get your finances in order

Before even looking at properties, it's crucial to have a clear picture of where you stand financially. This means evaluating your income, understanding your credit score, and handling any existing debts. 

Your credit score, in particular, can be a game-changer in home buying, affecting everything from your mortgage rate to loan approval. Tools like online calculators and budgeting apps can help you visualize your income versus your outgoings, highlighting areas where you can save money or reduce debt.

Debt-to-income ratio (DTI) is another vital metric lenders use to determine your borrowing capacity. It compares your total monthly debt payments to your gross monthly income, providing a snapshot of your financial health. Lowering your DTI can improve your chances of getting a better mortgage, so it might be worth paying down debts before applying for a mortgage. 

It’s important to remember that homeownership involves ongoing expenses, such as property taxes, insurance, maintenance, and unexpected repairs. Keeping these in mind early as you prepare to buy can save you from overextending yourself and dealing with costs that are hard to cover. 

Save early

Regardless of what your resources are, the earlier you start setting aside that down payment, the better. 

One immediate step you can take is to set up automatic deposits into a designated savings account for your new house. Even small amounts will help in the long run. Plus, the earlier you begin, the more you can passively save. 

You can also explore various options such as a high-yield savings account, reducing lifestyle expenses, and leveraging gifts from family. The saving period is there for you to explore and utilize every tool at your disposal so that you can have a clear picture of what your financial reach will be when you’re ready to explore listings.

Cutting back on comforts and vacations may be a tough pill to swallow, but if you organize yourself to immediately set aside those extra savings towards your future home, you’ll have a constant reminder of your progress.

Improve your credit score

By raising your credit score, you can potentially lower the interest rate on your mortgage, which can result in significant savings down the line. Luckily, there are multiple ways to improve your credit score. 

You can begin by paying your monthly bills on time. The better your track record of making timely payments the stronger your financial health and responsibility will seem in the eyes of lenders. 

Paying down credit card debt, automobile loans, or personal loans should also be your top priority, as this can not only raise your credit score but also improve your debt-to-income ratio. 

Other options include an increase to your credit limit, which will lower your credit utilization rate. The trick with this method is to continue maintaining a careful budget. 

Some other ways are transferring your debt to a card with a 0% interest rate or having yourself added as an authorized user on a trusted family member's credit card to help build your own credit history.

Use commission rebates for extra savings

If you are working with a limited budget, any means that can bolster your cash reserves are an invaluable tool. Commission rebates are one of the most effective ways to take advantage of such a perk.

In short, a commission rebate is simply a portion of your buyer’s agent’s commission passed on to you after closing. 

Prevu Real Estate unlocks commission rebates for buyers by simplifying the home-buying process with online tools and working with a team of expert salaried agents. This tech-enabled approach allows Prevu to offer savings to buyers based on the final sale price of a home via the company’s Smart Buyer Rebate.

You can use your extra cash to renovate your new home, buy new furniture, or simply replenish your savings account. 

Explore multiple mortgage options

Like any other purchase, your mortgage is a product, and you should get the best possible deal. Whether you're getting a conventional loan, a VA loan, or an FHA loan, it's wise to do your due diligence. 

To find the lowest rate, you must take the time to shop around. There's no limit to how many estimates you can get for a mortgage, but it's best to get quotes from at least three mortgage lenders. 

Comparing rates will give you a broad view of home loans so you can spot a good deal when you see it. 

As you gain knowledge of the going interest rates offered by different lenders, you'll empower yourself to choose the most competitive loan for your needs.

The importance of pre-approval

Pre-approval involves a lender evaluating your financial background—your income, credit score, debt, and employment history—to determine how much they're willing to lend you and at what interest rate. 

Unlike a simple pre-qualification, pre-approval requires documentation and a credit check, making it a stronger indicator of your ability to purchase a home. The loan offer you receive can help solidify your housing budget and price range, making your home search more focused and streamlined.

Plus, having a pre-approval letter immediately shows the seller that you are a serious buyer and ready to commit to the transaction, as it reduces some of the risk of the deal falling through due to financing issues. 

Lastly, a fully-underwritten pre-approval can help accelerate the closing process. Since your lender has already collected your financial information and moved forward with an initial approval, the final loan approval can happen faster once you select a property.

Negotiate closing costs

Closing costs differ from a down payment and range between 2% and 6% of the overall home price. Even for an affordable home, you could save hundreds or thousands of dollars by lowering that number. 

One possibility is asking the seller to exclude optional repairs included in the closing costs. In lieu of those repairs, you can ask for a reduction in price or a cash credit. 

Another option is to review the Loan Estimate Form with your lender, paying close attention to each line item. Some fees that might be reduced by shopping around are survey fees, home inspection fees, application fees, or title fees.

For example, you might find a title company to prepare a search and new deed at a cheaper rate than the lender has estimated. 

Consider a fixer-upper or starter home

A starter home is typically a smaller house or condo with fewer amenities and features, making it more affordable. Starter homes can be particularly beneficial for first-time home buyers. Even if you don't live there permanently, it will familiarize you with the home-buying process. 

Whether you decide to live there long-term or sell it later, you'll also gain valuable insight regarding homeowner's insurance, mortgage rates, and property taxes. 

Investing in a fixer-upper may be another way to find a house you can afford, as they typically require renovations and repairs. But you can make those renovations on your own time as needed while still living in the home. 

Once the house is up to your standards, you can choose to resell it or continue living there and enjoying your improvements. 

Interested in buying a home this year? Browse listings in your favorite city and see how much you can save with Prevu’s Smart Buyer Rebate.

DISCLAIMER: This material was provided for informational purposes only, and is neither intended to provide, nor should be relied upon as tax, legal, or accounting advice. Prevu and its subsidiaries do not provide tax, legal, or accounting advice. You are encouraged to consult your personal tax, legal, or accounting professionals before considering any transaction as your individual situation may vary.