Are you thinking of buying a new home? Before you start dreaming of the decorations and furniture, it’s time to figure out what you can afford. Yes, you have to do the dreaded chore of budgeting. It’s nobody’s favorite pastime, but it’s important if you want to make sure you can keep your home.
Before you set out to budget for your new home purchase, consider the following factors.
What do you Pay for Housing Now?
If you rent right now, it’s easy to see what you pay for housing. Is this a payment you are comfortable with or can you go higher? This is something you need to consider. You want to avoid having too much ‘payment shock’ as they call it. This occurs when your new mortgage payment is much higher than your current housing payment.
If you live with your parents right now and you don’t pay the rent, your payment shock could be rather high. While you can skip this step, you’ll want to be extra careful with your budgeting, especially if you aren’t used to having any large payments hanging over your head each month.
Know the ‘Extra Costs’
When you own a home, you’ll pay more than just the mortgage. You have to maintain the home and repair it. You also have to pay for the utilities. It’s a good idea to get a ballpark figure of these costs in the areas you want to move. You can ask professional realtors about the estimated cost of owning a home in each neighborhood. They should be able to give you a good estimate.
If you aren’t working with a realtor, talk to the seller themselves. Ask them what their average cost for utilities are each month. You can then estimate about 1% of the home’s value for annual maintenance and repair. Add these figures into the cost of owning a home when you figure out your budget.
Figure Out The Payment You Can Afford
Before you even get to the point of figuring out a purchase price, figure out what payment you are comfortable affording each month. This may sound backwards, but it will help you to stay within your budget. Make sure this final figure includes the total mortgage payment (principal and interest) plus real estate taxes, homeowner’s insurance, and association fees (if applicable).
Once you know the payment you can afford, you can use a mortgage calculator to work the equation backwards. Put your total payment in and the term and the calculator will determine the total loan amount you can afford. If you have cash set aside for the down payment, add that amount to the loan amount provided and you know how much home you can afford.
Take a Close Look at Your Spending
Once you figure out the payment you can afford, it’s a good idea to look at your spending. Will anything get in the way of you affording this payment each month? It’s a good idea to go through each month’s bank statement from the previous year. Are there months that you spent more than others? Christmastime is usually a time of heavy spending. What other times of the year do you spend more?
Look closely at those months. Can the mortgage payment from above fit into your budget still or will it be a struggle? If it will be a struggle, you may want to modify the mortgage payment a little more just to make sure you can afford the payment year round.
The bottom line is that only you know what you can afford. Yes, a lender can qualify you for a specific loan amount, but you have to pay the bill. If your mind is comfortable with the payment provided by the lender, don’t be afraid to ask for a lower loan amount. Knowing your budget for a home will help you find the home that is perfect for you.