Buying your first house is an exciting accomplishment, but it is also a significant financial investment. Creating a home purchase budget is a priority for first-time homebuyers. These steps will help you create a home purchase budget so you can begin your homeownership journey with confidence.
Step 1. Consider your income: Calculating your monthly income is the first step in determining how much money you may have available to spend on a mortgage housing payment. Think about how often you are paid and the total dollar amount you earn monthly. This may include your gross monthly wages from employment income, and may also include but not be limited to other sources of income such as regular bonuses, commissions, retirement, your average monthly net income if you are self-employed, and Social Security.
Step 2. Monthly Debts and Expenses: Next, consider your monthly debts such as car payments, student loans, credit card payments, personal loans and court ordered payments such as child support and alimony. Subtract the total monthly amount of these debts from your monthly income to determine how much money you may have available to spend on a mortgage housing payment. Don’t forget to account for other essential monthly expenses such as utilities, car insurance, cell phone, day care, etc. Although these debts are not considered by the lender, make sure to allocate money in your budget to cover them. Doing so will give you a clearer picture of how much money you may have available to spend on a monthly mortgage payment.
Step 3. Calculate Your Debt-to-Income (DTI) Ratio: The amount of debt you have in relation to your income is referred to as your debt-to-income ratio. This ratio is used by lenders to determine how much you may be able to borrow for a home mortgage loan based on your monthly income, debts, and budget. The minimum and maximum DTI ratio may vary depending on the mortgage home loan program you choose.
Step 4. Saving for the Down Payment and Closing Costs: Once you've reviewed your monthly income and determined how much you may be able to spend on a monthly mortgage payment, you must also consider how much money is available in your budget to save for down payment and closing costs. If you qualify, some lenders participate in programs that may help you cover a portion of these costs.
Step 5. Talk to a Mortgage Professional: A mortgage lender will be able to provide information about the various mortgage loan options available to you. Discussing your homeownership budget and goals will help the lender prepare a comparison of various mortgage loan programs for you to consider, and will help you decide which program will best fit your financial needs. Be prepared to provide documentation of your income, savings, and monthly debts; this will help the lender determine your debt-to-income ratio and how much you may be able to borrow for a mortgage home loan.
Step 6. Avoid New Debt: Managing a budget takes commitment and discipline to reach your goal. Any new debt added to your monthly budget may impact your debt-to-income ratio and the dollar amount you want to borrow for your new home. Try to avoid impulse shopping as this may take your budget off course.
Step 7. Be Realistic: While it may be tempting to stretch your budget for a home you really want to purchase, avoid straining your finances if possible. It is important to be realistic when determining your home purchase budget. Remember, there is life after your home purchase.
Establishing a budget for your home purchase is an important step in the process. By using these suggestions, you can create a realistic budget that may allow you to shop with confidence and find the ideal home to fit your needs.
Sources:
MyHome.FreddieMac.com, The Essential Guide to Creating a Home Buying Budget, https://myhome.freddiemac.com/blog/homeownership/20200123-budgeting-for-homeownership
NerdWallet.com, How to Budget for a New Home So You Won't End Up House Poor, https://www.nerdwallet.com/article/mortgages/how-to-keep-from-being-house-poor
RamseySolutions.com, How to Budget for a New Home, https://www.ramseysolutions.com/real-estate/how-to-budget-for-new-home
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