When it comes to buying a home, the most critical rule is fairly straightforward: don’t purchase a house you cannot afford. Of course, what constitutes affordable will vary from buyer to buyer.
No matter your budget, it’s likely a home will be one of the largest single purchases you will ever make. Therefore, it’s important to budget wisely and well in advance to guarantee you can afford the home you’ve always wanted without over-extending your finances.
These suggestions and best practices will help you begin the budgeting process as you prepare to invest in your future.
Have A Clear Understanding Of Your Finances
In order to even begin creating a budget, you need to have a clear understanding of your personal finances.
First, simply start by analyzing your total income. If you are purchasing a home with a spouse or partner, figure out your combined total income and how much you are willing to spend on your new house.
You should also tally all your monthly expenses. Factor in every detail—groceries, car payments, credit card bills, everything. You need to fully understand how much you spend each month. This way, you’ll know how much of your income is left over every month to dedicate towards your mortgage payment.
In order to fully understand how much home you can afford, take advantage of free, online affordability calculators. Zillow and Bank of America offer these tools to help you visualize your expected monthly payment.
Next, analyze how much you are spending on debt. If debt is taking up a significant portion of your income right now, you might want to hold off on purchasing a home, at least for a while.
When you apply for a mortgage loan, potential lenders will look at any outstanding debt you have incurred when deciding how much to lend you. If you have a significant amount of credit card debt, you are less likely to get a good deal from a mortgage lender.
Keep in mind, buying a house is a massive investment. You need to make sure you are financially able to afford a new home.
Follow The 25% Rule
Once you understand your finances, you can start the actual budgeting process.
Many finance experts recommend the 25% rule. This rule states that your mortgage payment should not be more than 25% of your gross income each month.
This is why understanding your finances is so important—you’ll be able to determine how much you can realistically afford to pay every month.
Again, you don’t want to over-extend yourself. If you’re worried about being able to afford your home, follow the 25% rule. This might mean that you need to look for a less expensive house than the one you have in mind.
But staying within a reasonable budget is vital in order to enjoy your new home without the stress of unrealistic expenses.
Remember The Down Payment And The Closing Costs
Generally, lenders want homebuyers to pay at least 20% of the purchase price in cash. While you can definitely put down a smaller amount and still get a good mortgage loan, the more you can pay for the down-payment, the less you’ll have to pay in interest.
If 20% is simply too much for you to afford, aim for around 10-15% as a down payment. According to the National Association of Realtors, the average U.S. homebuyer puts down just 12% when buying their first house.
There’s definitely some wiggle room when it comes to how much should spend on your down payment—but again, the more you can pay up front, the less you’ll pay in the future.
Also, it’s important to budget for closing costs. These can amount to between 2% and 5% of the purchase price. Don’t forget to add this figure to your budget. You don’t want to be surprised by extra expenses right before moving into your new home.
Plan For The Future
Finally, budget for the additional expenses that come with purchasing a house. Categories you’ll need to include in your budget are homeowners’ insurance, utilities, repairs, and maintenance costs, just to name a few.
Your dream home might seem affordable on paper, but if you haven’t budgeted for future expenses, you may need to look for a more affordable home.
Even the smartest budgets can get blown by unexpected costs, which is why you need to plan for more than just the mortgage price when establishing your budget.
Get Assistance Today
Creating a budget for your future home can be very overwhelming. If you feel like you’re in over your head, don’t worry. Real estate agent, Kim Clark, has years of experience under her belt and can help you formulate a realistic and affordable budget that fits your needs. Contact her today!