You’ve decided to start the process of buying a home. Congratulations! Now it’s time to figure out how much money you have, and what you can afford. The goal is to avoid purchasing more home than you can afford, but those variables change. In September 2019, the average price of a new home was almost $363,000. As an average, that may sound a bit steep, especially if this is your very first home.
A home may be one of the largest purchases you make. That’s why it’s important to go in with a clear head and everything aligned. Here are a few tips on learning how to budget when you’re preparing to purchase a new home:
- Start with the 25% rule
Your mortgage should not be more than 25% of your gross income each month.
- Consider every source of income you have. That means if you have 2 paychecks each month, each one should be included. If you have side work, that should also be included. That will encompass your total monthly income.
- Write down your monthly expenses and make sure you leave nothing out. That means your donations to charity, student loans, transportation/gas, movie night, coffee and everything else you spend on a monthly basis.
- Once you have these figures, subtract the expenses from the income. That will help you determine the max you will be able to pay for your mortgage. It’s also important to have a place to set aside some money for repairs. As a homeowner, things happen.
Any existing debt you have should be eliminated if you can afford it. The lower your debt to income ratio when you start the process, the better off you will be. Additionally, you should save as much as you can for a potential down payment. Depending on the loan, that will be 10 to 20%.
The figures you come up with will give you a good idea of where you stand and is a good starting point for your initial meeting with a mortgage broker. It’s also a good idea to review the types of loans that you may qualify for and look at the requirements. That will give you a general idea of the amount of money you will need to come up with for a viable down payment.
Although things may seem complicated, once you get started, everything should fall into place. Your real estate agent or mortgage broker will be able to provide more insight once you get started. Take your time and don't rush the process. It will be worth your while in the end.