Setting a Realistic Budget for a New Home
The thought of home ownership is appealing, but without setting a realistic budget, you may be stretching your finances too thin. What you’re approved to spend and what you can actually afford may be different.
A home will be one of the most significant purchases of your entire lifetime. If you’re a first-time buyer, you may be tempted to shop based on the amount a lender is willing to offer without considering additional expenses. Without proper budgeting, this can set you up for future financial hardship and even a potential foreclosure.
Whether you’re new to purchasing real estate or looking to make a second purchase, don’t end up house-poor. Here is a list of ways to help you set a realistic budget for a new home.
Calculate Your Debt-to-Income Ratio
A realistic personal budget is the first step toward home ownership. Create a list of your monthly expenses, including rent, credit cards, groceries, phone bills, and entertainment. Then, compare your expenses to your monthly income. The amount you have remaining is your expendable income. If you need help calculating your debt-to-income ratio, consider using a free online budget plan or calculator to organize your spending and track all your outgoing expenses.
Don’t Exceed 28% of Your Monthly Gross Income
You may be approved for a maximum mortgage amount, but it’s important to determine how much you can comfortably afford before making a purchase. A good rule of thumb is that your mortgage payment shouldn’t exceed 28% of your monthly gross income. Remember that if you have other debts, you should consider them in addition to your mortgage payments to figure out how much you can afford.
Add in Expenses for Upkeep and Upgrades
Navigating unexpected repairs and upgrades can take any homeowner by surprise. Even if your new house is in excellent condition upon closing, unforeseen issues like a broken water heater, a leaking roof, or a faulty appliance can take a substantial financial toll.
While maintenance and upgrades alone can quickly add up, other things like mowing the lawn, shoveling snow, and raking leaves could also be costly if you hire help. On top of that, make sure you remember to add homeowner’s insurance to your monthly budget. In other words, a $1,400 mortgage payment may seem attainable, but paying an extra $1,400 in maintenance fees and upkeeping could break the bank.
Find Ways to Cut Back
After calculating your debt-to-income ratio and adding in the costs associated with your mortgage payments and potential upkeeping costs, find ways to cut back on your monthly expenses. There may be several areas that you can cut back on. For example, maybe you’re paying for services you no longer use or paying more than expected for eating out. Make as many adjustments as possible so you can invest more money in savings and pay off outstanding debts to improve your credit score.
Save for a Down Payment
The more you can set aside for your down payment, the less you’ll have to pay for your monthly mortgage. You may not need private mortgage insurance if you invest 20% of the down payment on a home. Just ensure that the amount you set aside for your down payment is sufficient to keep paying your monthly bills.
Don’t Pay More than You Can Realistically Afford
Buying a house that costs more than you can realistically afford will eventually catch up to you. Many lenders advise purchasing a home that’s around 2.5 times your annual salary. However, the total purchase amount should include maintenance costs, upgrades, and HOA fees.
Get Pre-Approved from a Lender
Put your best foot forward by getting pre-approval from a mortgage lender before you begin house hunting. You’ll be taken more seriously once you’re ready to put an offer in because the real estate agent and current homeowners will know you’re prepared to go ahead with the sale.
It’s also good to check the market before submitting an offer. Check similar houses for sale in the area to ensure you’re paying a fair price. If the property is priced higher than other listed homes, it could be a potential bargaining chip.
Hire a Professional
Consider working with a financial advisor to determine how much you can afford on a new house. Although hiring an adviser might require you to spend some money upfront, it can be a worthwhile investment if you have the right person.
By taking the time to get your finances in order, save for a down payment, and research the market, buying a new home doesn’t have to be complicated. Hopefully, the above tips will help you get on your way to home ownership.