Get Your Budget Ready to Buy a Home
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Budgeting isn’t always the most exciting task, but it’s necessary to keep you on track and prevent you from spiraling toward a financial disaster. This is especially true for soon-to-be homebuyers. Not only do they have to keep their household running, but they also need to start planning for all the expenses involved in purchasing and owning a home.
Below you’ll learn several strategies to get your budget ready for life as a homeowner.
5 ways to get your budget ready for homeownership
Determine the mortgage payment amount you can handle
Before you get too far into the homebuying process, you should have a thorough understanding of the monthly mortgage payment you can comfortably afford.
Remember: Your mortgage payment is composed of four elements — principal, interest, taxes and insurance. Don’t assume you can afford a hypothetical mortgage by focusing solely on the monthly principal and interest amount. Your property taxes, homeowners insurance and, in many cases, mortgage insurance, all need to be factored into the monthly amount that works for you.
When you apply for a mortgage, your lender will check to make sure your housing expenses won’t exceed a certain percentage of your gross monthly income. As a general rule, try to keep your housing expense around 30% of your monthly income. This percentage is referred to as your front-end debt-to-income ratio.
You can get an estimate of how much house you can afford by using LendingTree’s home affordability calculator.
Practice making your monthly mortgage payment
Once you’ve determined the monthly mortgage payment amount you can reasonably afford, practice making those payments each month.
One potential method is to take the difference between your existing rent payment and estimated mortgage payment, and set it aside in your savings account each month. That way, you’re adjusting to that monthly expense before you actually begin repaying your mortgage.
Factor in your other monthly expenses
Be sure you’re considering the monthly obligations you have outside of your mortgage when budgeting for homeownership. For one, you’ll have utility bills that will likely be more expensive than when you were renting. Then there are cable and internet bills, maintenance costs, such as landscaping and pest control, and potential homeowners association fees.
Plus, you still have payments on any credit cards, personal loans, student loans or other existing debt you have. Lenders review your monthly debt payments — in addition to your estimated mortgage payment — to determine what percentage of your monthly income goes to debt, also called your back-end DTI ratio. In many cases, that ratio can’t exceed 43%, though there are some exceptions.
Save for your down payment and closing costs
Hopefully, you’re already well on your way to saving, but as you’re setting your budget — be sure you are saving money for both your down payment and your closing costs.
It’s possible to put down as little as 3% on a conventional mortgage and 3.5% on an FHA mortgage, provided you meet credit score and other requirements, but you’ll likely want to make as large a down payment as possible. The more you put down, the more equity in the home you’ll have starting out. You’ll also likely get a lower mortgage interest rate than you would with a small down payment. Keep in mind that in most cases, any down payment that is less than 20% of the purchase price means you’ll pay for mortgage insurance.
In addition to your down payment, you’ll need to budget for closing costs, which could range from about 2% to 4% of your home’s purchase price.
Don’t forget about reserves
In some cases, mortgage lenders want to see that you’ll have money left over in savings after you’ve purchased your home. Your savings goals should go beyond just saving the money needed for your home purchase anyway — you need to have cash reserves in place for any number of unexpected expenses.
Be sure you’re accounting for surprise costs, such as having to repair or replace a large appliance, car trouble or job loss. Prepare for a rainy day by stashing away three to six months’ worth of your monthly expenses in an emergency fund.
The bottom line
Buying a home is probably the largest purchase you’ll make as a consumer. Getting your budget in shape beforehand can help reduce the headaches that may arise from homeownership.