By Ellen James Martin
Universal Press Syndicate
May 9, 2008
"Lots of people need to go on a financial diet to attain homeownership. This is especially hard for young people coming out of college with a heavy student loan burden," says Eric Tyson, a personal finance expert and author of "Mind Over Money: Your Path to Wealth and Happiness."
Yet those who make financial sacrifices in advance of a home purchase put themselves in a stronger position than those who don't. Nowadays, purchasers with bigger down payments can often get lower mortgage rates or qualify for a larger home or both.
"The traditional 20 percent down payment is back, and I say hallelujah. I've been preaching in favor of bigger down payments for years," says Tyson, who is also co-author of "Home Buying for Dummies."
In America's consumer culture, it can take fortitude to resist spending on anything from new shoes to restaurant tabs. Moreover, the painstaking process of creating and following a stringent budget plan can be grueling. Yet, as Tyson says, the hardship is well worth it if it secures your place on the first rung of the housing ladder.
"Homeownership still has huge benefits. You're buying personal freedom from a landlord. Plus, when you take a fixed-rate mortgage, you're protected from future rent increases as the years go by," he says.
Here are several pointers for potential first-time buyers who must seize control of their finances as a first step:
1. Analyze your current financial picture. One huge obstacle to saving for a house is unmanaged day-to-day spending, says Leo Berard, charter president of the National Association of Exclusive Buyer Agents (http://www.naeba.org ).
Before you can decide how to reallocate your income, he says you should review where your money has gone -- category by category -- over a recent three-month period. This can be done either with paper and pencil or with such personal finance software as Quicken.
"Until they do an analysis, many people have no real idea where their money is going. For example, they don't realize how much they're spending for morning coffee at Starbucks," Berard says.
2. Create a spending plan with your home-buying intentions in mind. Once you know where your money is going, it's time to create a new budget that allows you to meet your basic needs while letting you amass a savings account for your home purchase.
Tyson encourages you to closely evaluate every category of your spending in search of possible reductions.
For instance, don't accept the rent on your apartment as a given - - especially if you live in a luxury complex with upscale amenities that you rarely use, such as a swimming pool and clubhouse. When your lease is up, are you willing to move to a more modest building to reduce your rental costs?
Likewise, you'll want to carefully examine your transportation spending.
If high gasoline prices for commuting are costing you more than they have to, what about switching to mass transit or getting by with one car instead of two?
You can also cut energy costs by reducing utility bills - - particularly air conditioning during the warmer seasons.
Financial planners often point to food expenditures as an area ripe for reductions. Many people are shocked when they realize how much they're spending on carry-out food and restaurant meals.
"Why not start packing a lunch for work and learn to cook basic meals at home rather than going out to eat once or twice a week? Anyone can acquire these money-saving habits if they realize the benefits of doing so," Tyson says.
As you create your new spending plan, don't overlook seemingly small or relatively infrequent expenditures that can add up.
For instance, Tyson suggests you ask your doctors if they would prescribe generic drugs rather than more expensive, brand-name ones.
Ask your dentist whether you need X-rays every six months or yearly. And closely analyze your telecom bills.
3. Battle your credit card debt. It's bad enough that many young people continue to pay student loans years after they've completed their educations. But many also acquire substantial credit card debt during their college years.
"If you're serious about saving for a house, you've really got to zero out that toxic debt," Tyson says.
Granted, paying off your credit cards will probably require severe financial self-discipline.
But obviously you'll also find it much easier to save for your down payment and closing costs when you're no longer juggling credit card payments at double-digit rates.
Most people don't need a financial adviser to help them dig out from credit card debt, Tyson says, though you can find useful guidance in books on the subject, such as "Deal With Your Debt," by Liz Pulliam Weston.
4. Don't let your friends talk you out of your home-buying plans. According to conventional wisdom, the present period is a poor time to buy a home, due to uncertainty about home value trends. So as you head into your money-saving drive, friends may question whether the financial sacrifices you must make are justified by your goal.
But Tyson says those who are dissuaded by friends from making a home purchase in the next year or so will one day regret their own failure to buy before the market recovers and prices rise again.
"All the fundamentals are there for a recovery in real estate. Ten years from now, people who didn't buy in this market will kick themselves that they didn't take advantage of the bargains now available," he says.