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This post is sponsored by Bank of America, but all of the opinions within are those of The Everygirl editorial board.

5 Expert-Backed Money Moves to Make When Planning for Your Dream Home

written by TRISHA SPROUSE
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Source: Aryana Johnson
Source: Aryana Johnson

When you hear the words “dream home,” you’re probably not the only one to picture an upscale residence that boasts impressive square footage, high-end finishes, and a killer view. Maybe it’s a stunning seaside property with Cape Cod vibes, or perhaps it’s a modern Mediterranean-style house with beautifully manicured grounds. And while these types of luxury properties are certainly nice to pin to your Pinterest board, it’s good to remember that a dream home can also be a starter home with lots of potential.

In fact, buying a starter home sets you up to build equity that can help you afford a fancier home down the road. But how do you know if you’re even financially ready to buy a home? And what can you do to prepare your finances, so that you’re able to get approved for a mortgage? What about saving for a down payment and closing costs? These are all great questions—and luckily, we partnered with Bank of America to bring you expert answers.

In this installment of The Everygirl’s Guide to Building Wealth (read part 1, 2, 3, and 4), we chatted with Kathy Cummings, Senior Vice President of External Partnerships at Bank of America. She gave us the scoop on all the best money moves you can make when you’re planning to buy a home. Whether you’re just now starting to think about homeownership or you’re actively hitting up every open house in your target neighborhood, here are five expert-backed strategies that can help make your dream of home ownership a reality.

Kathy Cummings, Bank of America
MEET THE EXPERT

Kathy Cummings

Senior Vice President of External Partnerships at Bank of America

Kathy Cummings leads the External Partnerships team for Bank of America Corporate Social Responsibility (CSR). Cummings supports Bank of America’s $15B Community Homeownership Commitment, designed to assist 60,000 families achieve the goal of sustainable homeownership. Additionally, she is responsible for managing external partnerships, working with real estate trade organizations. Cummings oversees the bank’s origination program with Neighborhood Assistance Corporation of America (NACA) and the Bank of America Connect to Own® fee for service homebuyer education program. She has also served as National Pricing Executive for Bank of America Home Loans.

1. Determine the monthly payment you can afford

It’s tempting to think in terms of how much you could borrow, but Cummings advises it’s best to focus on how much you should borrow. You want to make sure you’re not stretching yourself too thin. “As a general rule of thumb, take your monthly income, before taxes, and multiply that by 28%,” says Cummings. “This gives you an idea of what you can comfortably afford for your monthly mortgage payment.” 

Be sure to account for other expenses, such as property taxes, homeowner’s insurance, and private mortgage insurance (PMI) when evaluating monthly costs. One of the easiest ways to figure out how much you can afford is to use an online affordability calculator, Cummings suggests. You simply plug in your numbers, and it does all the hard math for you. It’s a helpful tool that can give you an estimated mortgage payment for a property you might be eyeing, and it can help you solidify your price range. 

2. Avoid making any major changes to your finances

When you’re applying for a mortgage, the name of the game is consistency. “Lenders look for reliability,” Cummings explains. In addition to maintaining a good credit score, there are a few financial moves you should avoid, since they can affect your chances of getting approved for a mortgage loan. These include:

  • Avoid getting a car loan: “If your car breaks down, resist the temptation to take out a loan for a new or used one unless absolutely necessary—adding a big expense like a car loan can hurt your credit score and make it harder to qualify for a mortgage or increase your monthly payments,” says Cummings. “If you can’t borrow a car or find another way to get around until you buy a house, think about delaying your home purchase if possible.”
  • Hold off on getting a new credit card: “Opening a new credit card can also hurt your credit score, just like a car loan,” Cummings explains. “This could affect your mortgage rate and how lenders view you as a borrower. Avoid new credit cards until after you’ve secured your mortgage.”
  • Don’t change jobs: “Your employment status is important when applying for a mortgage. Switching from a stable salary-based job to one with hourly or commission-based pay can make lenders uneasy because of the fluctuating income,” cautions Cummings. “If you’re considering a job change, think about how it could affect your income and consider adjusting your home-buying timeline accordingly.”
Source: Anna Shvets

3. Save for a down payment and closing costs

When you’re saving up for a down payment, Cummings advises that aiming for 20% of the home’s value can help you avoid paying for private mortgage insurance and lower your monthly mortgage payment. “Also, don’t forget to save for closing costs, which typically range from 3 to 5 percent of the loan amount and include expenses like title insurance and taxes,” reminds Cummings.

However, Cummings says it’s a myth that you’re required to put 20% down to purchase a home. She explains that as long as you have good credit, there are numerous resources and programs available for first-time homebuyers with limited budgets. For example, Bank of America’s Down Payment Grant provides eligible homebuyers with 3% of the home purchase price or up to $10,000 – whichever is less – in grant funds for the down payment, with no repayment required.

The best part is that Bank of America’s grants can be combined with other home-buying assistance programs, such as America’s Home Grant, which could give up to an additional $7,500 that could go towards closing costs or lowering the interest rate. If you’re not able to put 20% down on a home, Cummings highly recommends that you check out Bank of America’s Down Payment Center and grants, as well as local resources, to find assistance programs that suit your needs.

4. Explore your best mortgage options

Just as you look at many different houses before you decide which one to make an offer on, you should also weigh your options when it comes to mortgages. According to Cummings, these are the main types of loans to consider:

  • Fixed-rate Mortgage: “With a fixed rate, your interest rate and monthly payment remain the same throughout the term of the mortgage,” says Cummings. “This offers stability and makes budgeting easier, but the initial interest rate may be higher than an ARM.” The most common loan terms for fixed-rate mortgages are 30 and 15 years.
  • Adjustable-rate Mortgage (ARM): “An ARM has an interest rate that can change over time based on the market,” explains Cummings. “While initial rates are typically lower than fixed-rate mortgages, your monthly payment can fluctuate, making budgeting more challenging after the initial period.”
  • Interest-only Mortgage: “This type of mortgage allows you to pay only the interest on the loan for a certain period, delaying repayment of the principal,” Cummings states. “It can provide flexibility with monthly expenses, and for first-time buyers, it can defer larger payments until later when you might have a higher income.” With this mortgage option, make sure to exercise caution because after the initial period your loan payment will substantially increase.

If you’re a first-time homebuyer with limited funds to cover the down payment, Cummings explains there are also various options you can explore, depending on your financial situation, credit history and personal preferences. “For example, there are often low down-payment loans available to first-time buyers, such as Bank of America’s Affordable Loan Solution® mortgage,” says Cummings. This loan gives buyers a low down-payment option (as low as 3%) and competitive interest rates.

Source: Thirdman

5. Keep your future financial goals in mind

While it’s easy to get swept up in the excitement of buying a home, Cummings says it’s important not to lose sight of your other financial goals. If you’re currently paying off student loans or saving for retirement, consider how owning a home fits into your long-term financial picture to ensure you’re not overextending yourself. “It’s also crucial to have a home emergency fund,” Cummings advises, “to cover unexpected situations like burst pipes or flooding.”

Besides the actual cost of the house, you should also keep in mind that there are other expenses involved when purchasing your first home. “These can include property taxes, insurance, utilities, and potential homeowners’ association fees if you’re in a community,” says Cummings.

Buying a home can be one of the best ways to build wealth—and by looking at the big picture of your finances, as well as factoring in all of the costs associated with buying a home, you’ll set yourself up for a more secure financial future.

Additional Resources

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This post is sponsored by Bank of America, but all of the opinions within are those of The Everygirl editorial board.