Home Budgeting 101: The Complete Guide to Your Ideal Home Budget
Did you know that the majority of buyers purchase a home that’s approximately one and a half times to two times their yearly income? Lenders often look at your debt-to-income ratio, which is how your mortgage payments and other debts would stack up against your pay. Lenders like to see a low debt-to-income ratio as a low ratio shows a lack of debt. It is important to keep this ratio as low as possible while also balancing good credit. Budgeting is a great way to ensure your debt-to-income ratio stays low.
A good credit score is very important but not the only factor in deciding whether to give a loan. Conventional lenders often use the “28/36 rule” when determining whether to offer you a loan. Basically, home-related payments, such as taxes, insurance, and mortgages shouldn’t exceed 28% of your pre-tax income. Any other debt you have, such as car payments and student loans, shouldn’t exceed 36% of your monthly pre-tax income and will be considered in the process.
Below are the steps to budgeting for a home if you’ve never done so before, and a refresher for those looking to improve their home finance budgeting skills!
Step 1: Build Credit
Lenders will consider your credit score along with your monthly income and the value of the home you are looking to buy. A higher credit score could lower your interest rate and monthly payment! Start em’ young! Get a credit card with a low line of credit and just make small and smart purchases. Building credit early is one of the best life hacks we could give you. Most importantly, remember to keep making those credit card payments on time each month!
Step 2: Practice Paying a Mortgage Before You Buy
Say your monthly income is $8,000. At 28%, your monthly mortgage payment shouldn’t exceed $2,240. If your current rent is $1,800, that means you still need to pay an additional $440 each month. So put that money into a special savings account! Having practice demonstrates to lenders that you can afford the higher payment AND you can save a little towards a down payment! It’s a win/win.
Step 3: Save a Down Payment
A down payment usually ranges from 10-20% of the purchase price. If, however, you make a down payment that is less than 20%, you will have to pay private mortgage insurance (PMI), which covers the bank if you can’t complete your payments. A down payment is usually a small percentage of the loan but can reduce the amount of home you can afford.
Step 4: Calculate the Hidden Expenses
Make sure to map out the additional expenses with buying a home. Preparation will be your key to success. Keep expenses like the inspection cost or the appraisal cost, usually between $350-400, in mind. Remember that on top of the down payments are also closing costs that can go upwards of $5000.
Step 5: Leave Wiggle Room When Budgeting
Life happens! Whether it is trying to impress your partner, buying tickets to a surprise concert, helping the family with an emergency, or even just forgetting about certain expenses allow yourself some slack. Let’s say you find your dream home but it is slightly over budget, leaving a little wiggle room helps you change around other expenditures to help it move into your budget. Trust us, no harm done by giving yourself a little extra buffer!
Step 6: Differentiate Between Wants and Needs
We live in a consumer’s world, constantly being thrown ads telling us what we need. Most of these items, however, are just accessories to what we truly need. Map out your priorities on your budget, separating the wants and needs. Let’s say you really want a fireplace, large kitchen island, and large master bathroom. You need to be close to your kids’ schools, however. Differentiating between wants and needs will help you choose the home five minutes from their school with everything you want except the large kitchen island, rather than a home 30 minutes from their school.
Step 7: Stay Organized
Keep everything organized to make buying your dream home a breeze. There are so many easy options and guidance tools to help you stay orderly. Great budgeting apps include Mint, PocketGuard, EveryDollar, and Mvelopes. You can also use online tools like Quickbooks, Excel, or Google Sheets to keep information organized and accessible. Filing bills and major documents and keeping checklists are also great ways to keep on top of everything and keep yourself from letting it all pile-up.
Step 8: Know Your Strengths and Weaknesses
Rock your strengths but account for your weaknesses. Write out a game plan for how you will combat your weaknesses. Let’s say you are a decoration fiend. You love all the trinkets, the throw pillows, the fuzzy blankets, and funky rugs. Instead of letting yourself run wild at Home Goods or Pottery Barn, you can have an extra budgeting category related to Home decor. A small extra step like this will keep your budget in check and save you a lot of money!
Step 9: Set up an Accountability Plan
Stay smart and don’t allow yourself to see homes way above your budget. You put in the time and effort and owe it to yourself to go all-in when budgeting. And as a bonus, if you saved in some places you can use your wiggle room to splurge in others, rather than being bogged down by debt. You will be so much happier that you listened to your budget when you find a dream home you can afford.
Step 10: Get Psyched About How Ready You Will be to Buy!
With all of these budgeting tips and tricks in your back pocket, you are on the way to a stress-free and exciting home buying experience! Happy Searching!
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