January 31, 2024
Crunching the numbers for your new home requires you to do some research and develop a financial plan, especially when the market is tight. Here, we share our best strategies for creating your own home buying budget.
Crunching the numbers for your new home requires you to do some research and develop a financial plan, especially when the market is tight. Here, we share our best strategies for creating your own home buying budget.
Creating a new house budget comes down to several factors, each of which need careful consideration. These include the following:
Keep in mind that your credit history will not only impact whether you can qualify for a mortgage loan. It will also impact the type of interest rate and terms you are able to secure. Your first step, therefore, will probably beto talk to your lender about a pre-approval where they can pull your credit record and put some numbers together to help you develop a preliminary budget for a new home.
A pre-approval is an important part of your home purchase since it will help to make your offer stronger, especially when you are competing against other buyers. There is an assumption that home sellers are only looking at the bottom-lineprofit for their home sale, but in reality they are looking at a combination off actors including who has solid financing and can actually see the purchase through to completion. You can send the most outrageous offer in the market butif you don’t have a pre-approval to back it up, it will likely be ignored by the sellers and their listing agent.
A realistic budget for a house depends on the market where you’re looking, the size of the home, the style of the home, and the home’s condition. You will need to think about your financial needs when determining what type of home you can afford and what types of loan terms you want to secure.
For example, your lender may tell you that, according to your credit history, you qualify for a home loan of $350,000. However, that may put you at the absolute maximum of your monthly budget, leaving you little money with which to enjoy your new home. Now, imagine that you move into the home and have a major system failure costing several thousands of dollars. Where will you get the money to make that repair or replacement if you’ve gone all in on your budget just to buy the house in the first place?
Alternatively, imagine that you max out your budget when buying your home, then find out that you and your significant other are having a baby. Will you have the money for the costs associated with your growing family? Perhaps you were planning to return to school for an additional degree. Will you be able to afford tuition or student loans along with your house payment?
A realistic budget, then, is one that considers not only the home purchase but also expenses associated with it and your other financial plans and obligations.
The 28% rule is an informal way of determining how much house you can afford. It’s based on the idea that you shouldn’t pay more than 28 percent of your gross income for housing each month. For example, if you earn $6000 per month or $72,000 annually, you would be spending $1680 per month for housing according to this rule.
While that may allow you a modest home payment, keep in mind that your housing expenses can jump if, for instance, you are living in a condominium or a community with an expensive homeowner’s association. You may also end up spending significantly more if you buy a fixer upper and are trying to make needed repairs while you are paying for the home.
Use the 28% rule as a starting point to help you determine your housing budget, but keep in mind that in some markets it may be difficult to get the house you want with your current budget. Talk to your real estate agent or broker about neighborhood options where your dollar may go further.
Down payments can vary depending on market conditions as well as based on the type of mortgage loan you secure. The traditional figure of 20 percent is by no means essential, though it may give you added peace of mind and the ability to avoid private mortgage insurance (PMI), which is charged each month on home loans where there is less than 80 percent equity in the home.
Here are some of the minimum down payment requirements for a variety of loan types:
Keep in mind that different mortgage underwriters have different requirements for where your down payment can come from. For example, some lenders have strict requirements about how or when gift funds can be used as part of a down payment. They will want to see that the person providing the gift of money is close to you and they will want documentation showing that the person does not expect repayment. In addition, they may ask for a canceled check or bank statement to show that the money was moved directly from their account and into yours.
In addition to your down payment, you’ll need to know how to set a budget for new home costs associated with the purchase process and the costs associated with your ownership. These may include some or all the following:
In addition, you’ll need to have an emergency fund for unexpected repairs. You may want to consider a home warranty to help cover some of the major systems, in whole or in part, especially if you’re buying a home that’s older or hasn’t been updated in several years. Talk to your real estate agent and your home inspector about the life expectancy of major elements so that you know how much you should start setting aside for upcoming repairs, replacements, and updates.
Moreover, consider the lifestyle associated with your new home. Are you moving to a community where a country club membership is expected? Are you buying a home with some land where you’ll want to spend some money on equipment or landscaping? Are you buying a home in a resort area where you’ll want to own a boat or spend time on the golf course or tennis courts? Make sure that you leave yourself enough money in your budget to enjoy your home and the lifestyle it offers.
In addition to the monthly payments and maintenance on your home, consider your lifestyle. What do you love to do? Do you enjoy traveling? Do you love entertaining? Do you go out every weekend with your friends or significant other? Do you enjoy having the latest tech gadgets, the newest car, or the most au courant designer clothing?
Owning your home should enhance the life you already have, not force you to make unacceptable sacrifices or trade-offs. While it may be tempting to max out your budget if you fall in love with a home, consider whether it will still allow you to live comfortably and live the life you love.
In addition, you may find yourself purchasing more house than you really need and saddling yourself with larger utility and maintenance bills plus additional expenses for furnishing and decorating a larger home. This can lead you to take on unnecessary debt, making your financial condition worse instead of better.
Wherever you are in the planning process for your home purchase, you need expertise and advice to make the right decisions. When you work with Newzip, you’ll get the support you need from a personal home advisor who can provide you with guidance and ensure a smoother, more streamlined process. In addition, you’ll receive cash back at closing to make your home buying process even more of a win. Let Newzip help guide you through the complexities of your home purchase so that you can find the home you want at a price you can afford.
