The American dream…buy a house, but is this dream accessible to all? Not everyone in America is part of the six-figure or two percent club. Does that mean we are unable to reach our goal of home ownership? Can a salary of $40,000 allow us to pursue the American dream? Can you buy your first home on a meager salary? These are all valid questions, and many experts agree that home ownership is nearly impossible to reach with a household income of $40K.
We at Broke Budget Girl are not experts, but we have our personal experiences and tips that we will share with you. These tips will help you to see that buying a home for $40K is, in fact, possible.
The Background
It’s about three years post-divorce. I have received my Bachelor’s in Accounting and work full-time for a small accounting firm. My annual salary was $38K. Boy, did I hit the big time, or so I thought! At the time, I was living with my parents, which allowed me to save a considerable amount of money. I started feeling unsettled in my spirit and knew it was time to venture out into the world on my own. I’ve never lived alone before either I was living in my parent’s home or I was living with my now ex-husband.
I needed to know that I could make it on my own. Over time the desire to live independently grew stronger and stronger. So strong that I could no longer ignore it. It was time for me to find my place in this world. They say when you know, you know, and I knew it was time to leave the nest.
I began to get my credit together and determine how much money I had to pay for monthly expenses. I thought I had considered all that needed to be accounted for. Later, I would realize that I knew far too little about what it meant to own and keep up a house. I didn’t know there were such expenses as sewer and water bills, not to mention lawn care, boiler, and chimney cleanings (we’ll discuss these things in depth later). I was genuinely naive to these things.
The Search
After getting my credit together, it was time to start the search. I bought a handy dandy notebook solely dedicated to my house purchase. In it, I kept all the details of each property that I was fond of: price, location, needed repairs, number of bedrooms, and baths. Anything that pertained to the property, I wrote down in that notebook. I found a trustworthy realtor who happened to be the across-the-street neighbor (Thank God for Michelle to guide me through the process).
Michelle and I ran over how much house I could afford. Back then, my $40K salary offered me many options because of the recent 2008 housing crash that made homes extremely cheap. After searching for many months, I finally found the home I felt best suited for. It is a small cape house with above-average acreage to be a city home. My father was happy with it, so we went for it. We offered the asking price, and it was accepted! Who knew the girl fresh out of college would be a homeowner less than a year later?
The Numbers
I was so happy to be a single woman who bought a house and made only $38K annually. By all accounts, I shouldn’t have been able to do that, but timing played a significant part in my ability to secure a property in New England, making only $38k for $134,000. My monthly mortgage payment of $960 included principal, interest, and escrow and represented 33% of my gross income…Whew weeee!
I was 4% over the industry standard of 28%. If you are not willing to sacrifice, I recommend spending at most 28% of your gross income on the cost of your house because going over 28% will mean you will have to sacrifice in other areas. Believe me; I had to sacrifice! Thinking back on that time, there were many things that I would have done differently in acquiring the property. Below are some tips to guide you on your home purchase journey
Location, Location, Location
Times have changed since I purchased my home. Property values have skyrocketed through the roof, making the once-affordable areas out of reach for low-income families. But all is not lost. You may not be able to afford a home in the state where you live, so consider relocating. If homeownership is high on your priority list but earning a higher income is not possible, consider relocating to cities or states where housing prices are more reasonable. Relocating is an ideal situation for those who work remotely. Bankrate.com lists the top 20 cities where homes are listed for $100K – 120K. Cities such as Cleveland, OH (if you can withstand the frigid cold), Columbia, SC, and Baton Rouge, LA, currently have homes for sale that would fit nicely with a $40K salary budget. Be bold and move if it will get you to your goal of homeownership.
Stay Within Your House Budget
When purchasing a home, you should allocate at most 28% of your pre-tax salary to your mortgage payment. Staying at 28% is hard on smaller incomes, but staying within the guideline is imperative. The higher your mortgage payment, the less you can spend on things like heat and lights!
Seizing Opportunities
The BIGGEST thing that helped me purchase a home on a $ 40K salary was the ability to seize an opportunity when it presented itself. It was just luck that a housing crash happened, but planning and preparation put me in a position to capitalize on that luck. Just because the housing market and interest rates are high now doesn’t mean it always will be. There are many opportunities out there for you to seize in order to buy your first home on a meager salary.
Generally, the higher interest rates rise, the less likely a person is to purchase a home due to increased mortgage payments. This, in turn, creates a surplus of homes on the market which over time causes the price of houses to decrease because no one is willing to buy at the higher interest rates. When that inventory surplus occurs, will you be ready to capitalize on it? Now is the time to work on your credit score to secure lower interest rates, and now is the time to save money for a down payment.
Search the internet for grants that are available to first-time homebuyers. Your income may qualify you for grants that can be applied to your down payment. I scored a $2,500 city grant that I applied to my down payment. The saying goes, “Stay ready so you don’t have to get ready.”
Know the True Expense of Owning Property
As stated earlier, I had yet to learn about ALL homeownership expenses. For starters, I had yet to understand what it would cost to run an oil house for heating! OMG! It nearly killed me! No cap. I spent almost $3,000 in any given year to heat an 850 sqft living space! Say what! That is a lot on a $38K (pre-tax) salary. I would not put the thermostat higher than 60 degrees in New England to reduce my winter oil consumption. It often wouldn’t exceed 55 (talk about freezing your arse off!).
Some days I used my gas stove rather than the heating system because the cost of residential gas was cheaper than letting the oil furnace run for a source of heat. The gas company caught on to me and sent me a friendly cease and desist letter, but hey, you gotta do what you gotta do. I eventually changed my heating system to gas from oil for a whopping $8 grand! This is just one of the unexpected bills I should have considered when determining how much house I could afford. Be sure to include:
- Heat, electricity, sewer, water, and so on.
- Set money aside monthly for repairs because, eventually, something will need to be fixed. Whether you take care of your lawn or someone takes care of it for you, an expense will be incurred.
- If you like pretty flowers and green grass, expect your water bill to increase to water those nice pretty things.
Side Hustle Nation
Join the side hustle nation club. Okay, I don’t think there is such a club, but there should be if there isn’t. Get your side hustle on like I had to. If your current salary isn’t enough to buy your first home on a meager salary then side hustling may be for you. There are many ways to earn some extra dinero on your own time. Try ridesharing with Uber orLyft. If toting people around doesn’t strike your fancy, try DoorDash for food delivery. What you do doesn’t matter; get out there and hustle.