So, you’re thinking of buying a home. Congratulations! Owning a home is one of the most significant milestones you can achieve. But before you start signing any paperwork, there’s one essential step you need to take: creating a budget. Your budget will determine how much house you can afford, and it’s important to be realistic about what you can and cannot afford.
Not sure where to start? Look no further. This guide will give you everything you need to create a budget for your homebuying journey.
How To Know How Much Home You Can Afford
When you’re ready to buy a home and wondering how much you can afford—especially if you’re a first-time homebuyer—a good rule of thumb is the 28/36 rule. This rule states that monthly housing costs (mortgage payment, taxes, insurance, etc.) should not exceed 28% of your gross monthly income. Additionally, your total debt obligations (housing costs plus any other debts like car payments or credit card bills) should not exceed 36% of your gross monthly income.
This rule is a good general guideline to follow when you’re trying to determine how much house you can afford. However, it’s important to remember that every situation is unique, and you may need to adjust these numbers based on your circumstances. Ultimately, the best way to figure out how much house you can afford is to speak with a qualified lender who can help you understand your options.
Know Your Numbers
Once you have a rough idea of your price range, it’s time to start making a budget. To do so, you’ll have to calculate your income and expenses. Income includes your salary, investments, and other sources. For expenses, you’ll need to consider fixed costs like utilities and existing rent or mortgage payments and variable expenses like food and entertainment.
Another good number to know for the home-buying process is your credit score—generally, the lower your credit score, the higher your down payment. You will also want to factor in any existing savings and debt repayment. Once you have all these numbers figured out, you can start creating a budget that works for you.
Consider All Expenses
When making your budget, don’t just consider the mortgage payment; factor in things like maintenance, homeowners insurance, property taxes, HOA dues (if applicable), and any necessary repairs or renovations. It’s also important to set aside money in an emergency fund if something unexpected comes up after moving in, like a leaky roof or broken furnace.
Another cost to remember is the closing cost. When buying a home, you can expect to pay various fees at closing. Typically, closing costs are between 2% and 6% of the home’s purchase price. Closing costs can include various fees, such as loan origination fees, appraisal fees, title insurance, etc. In some cases, you may be able to negotiate with the seller to have them pay some or all of the closing costs.
Now that you know how much house you can afford, it’s time to start saving up! The first significant expense in the home-buying process will be the down payment. Depending on your mortgage type, you’ll likely need anywhere from 3% to 20% of the purchase price for a down payment. If possible, try to save even more than that so that you can avoid paying private mortgage insurance (PMI), an insurance policy that protects the lender in case you default on your loan.
The more money you can put down up-front, the lower your monthly mortgage payments will be. In addition, you’ll have more equity in your home. So start saving now for that down payment and beyond, and you’ll be one step closer to achieving the dream of homeownership.
Stick To Your Budget—No Matter What
The final and most crucial step in making a homebuying budget is sticking to it—no matter what! It can be tempting to stretch yourself thin financially to get the “perfect” house but resist the urge. It’s better to buy a home within your budget and make improvements as needed than to blow your entire budget on one property and end up with nothing left over for repairs or improvements down the road.
One way to stick to your budget is to sit down and make a list of the essential features for your new home and the ones that would be nice to have but aren’t deal-breakers. This will help you stay focused on your must-haves and resist temptation when you see a home with all the bells and whistles.
Buying a Home on Your Budget
Homebuying can be exciting, but it’s important to remember that buying a home is a big financial decision. Therefore, when purchasing a home, it is essential to stick to your budget. Creating a budget might seem daunting at first, but it doesn’t have to be. By following these simple steps and being mindful of your financial limitations, you can create a budget that works for you—and helps make your homeownership dreams a reality. Good luck!