If You Can’t Afford A Down Payment On A Home But Still Want To Buy, Do These 3 Things

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If you’re interested in becoming a homeowner, experts typically recommend saving up 20 percent of the purchase price for a down payment. But if you can’t afford the full 20 percent, that doesn’t necessarily mean you can’t become a homeowner, says AJ Smith, VP of financial education at 

If you’re still interested in buying but know you can’t afford to put down 20 percent, follow these three steps to see if you’ll be able to swing it.

Take stock of your personal finances

“It’s really good to have a handle on your personal finance situation at the time,” Smith tells CNBC Make It. “What your budget looks like, what you feel comfortable with, what not having that 20 percent down will do to your monthly mortgage payments.”

In order to understand if you can still afford to buy, you need to take a deep dive into your own expenses, bills and income, and see how much you’re able to dedicate toward housing each month. If you find that you’re already struggling to stay on top of your bills, this might not be the right time.

Be thorough and honest when you crunch the numbers, so you’re getting an accurate representation of your overall financial picture. For example, how much are you paying in rent? Are you considering moving to a cheaper rental while you continue to save? If that’s the case, you’ll want to factor in the cost of moving twice into your current expenses, Smith says. You might find that it’s cheaper to go ahead and buy the house, even if it means ponying up for private mortgage insurance.

You should also take the time to calculate how buying will affect other financial goals, such as retirement or college funds. After all, “there’s a bigger financial picture to be thinking about,” and buying a place is just “one piece of it,” Smith says.

Figure out how much you can comfortably spend

Next, understand how much you can comfortably put towards housing each month without taking on an overwhelming amount of debt. Smith warns that overstretching your budget is one of the biggest mistakes homeowners can make.

“The general rule of thumb is to no spend more than 30 percent of your gross monthly income on housing,” she says. But outside of that, the amount of debt you can handle depends on a host of other factors.

“It’s really what you’re comfortable with, how secure you are in your job, how much savings you’ll have left over,” Smith says. “It’s a good idea not to deplete your savings for that down payment and those upfront costs because you do want to maintain that emergency fund in case something were to happen.”

Factor in PMI

A house’s sticker price never tells the full story. Don’t forget to factor in how much private mortgage insurance would affect your monthly payments, Smith says. PMI is a type of insurance that protects lenders if you aren›t able to fulfill your monthly obligations. It›s typically required of anyone who makes a down payment of less than 20 percent.

Ask yourself: How much will PMI increase your monthly costs? Would you have to deplete your savings to put a full 20 percent down? What are your other housing options if you don’t buy right now?

In addition to paying PMI, you’ll also want to consider other expenses such as closing costs, insurance fees, property taxes and repairs and maintenance.

Look at a calculator that shows you so you›re not just guessing,» Smith advises. «Don›t say, ‹It›s probably better to buy right now,› or ‹My cousin said it was better to buy right now.› Running those numbers is the key thing, because then you can actually see what are you talking about.”

 By Ruben Gurgov [h/t CNBC, Emmie Martin]