Know Your Budget & Stick To It
Buying a home is often the largest and most expensive transaction a person will make in their lifetime. Especially for first-time homebuyers, this is often a daunting process filled with financial considerations, loan applications and deadlines. For those serious about taking the plunge into homeownership, it is time to take the first crucial step: understanding and sticking to a budget before setting out to buy a house.
Do Your Research On Financing
Before diving into the specifics of budgeting, it is important to gain an understanding of the financing process. Shopping around for a loan can often be the deciding factor in how much of a home a person can afford while also deciding if they can even qualify for a loan in the first place. Moreover, understanding the difference between pre-qualifications and pre-approvals is essential in developing a realistic budget.
A loan pre-qualification simply means that the overall framework of one’s financial situation looks good on paper based off of the information a potential buyer provides. A loan pre-approval, on the other hand, is a more intensive process of the loan underwriting process. It is highly advised that potential homebuyers opt for the pre-approval route. A loan pre-approval means that the lender has reviewed a potential borrower’s income, assets and debts and stated a specific amount for which the borrower can take out a loan.
Taking the loan pre-approval step will go a long way in determining the budget to stick to when looking for a house. For example, a loan pre-approval will detail the maximum amount a buyer should spend on a house, the type of loan, any associated fees, necessary taxes and the potential interest rate.
Calculate Your Monthly Expenses
Once pre-approved, potential buyers must calculate all possible expenses tied to monthly payments — both mortgage related and not. The most obvious payment to consider when calculating monthly payments is the mortgage itself. This should include the principal (the amount borrowed) and any associated interest.
However, many people overlook the following additional costs:
- Home repairs
- Property taxes
- Utility bills (power, water, etc.)
- Homeowners insurance
- HOA fees (for homeowners living in a planned community)
One should also factor in additional miscellaneous costs associated with the traditional upkeep of a home like landscaping, trash pickup and more.
Additionally, when looking for monthly expenses, buyers need to consider any potential refinancing costs associated with the loan should they decide to refinance in the future. Additional costs associated with refinancing the loan can include closing costs and loan fees.
Buyers should use a combination of a mortgage calculator and a budgeting calculator to estimate the “true” cost of a home. Those who are currently renting should use their rent amount as a factor in offsetting all other costs in the mortgage payment, including principal and any additional costs associated with monthly payments.
Create A Financial Plan
Going hand-in-hand with understanding and being realistic about one’s budget is having a solid financial plan in place. This includes making appropriate cuts to other expenses and areas of spending in order to save for a down payment and other associated costs.
Rather than living with the “all or nothing” attitude when it comes to saving for a home purchase, potential buyers should take a more incremental approach, setting aside funds little-by-little until they have saved the desired amount needed for the house.
Those who are unsure where to start when setting up a financial plan should consider working with a credit counselor. Not only can they help advise potential homebuyers on budgeting, but may also be able to point them in the direction of resources available for assistance in purchasing a home.
Know Your Limits & Stick To Them
When it comes to buying a house, it is important for potential buyers to know their budget and stick to it. Even if two prospective buyers were pre-approved for the same amount, their budgets can and will be different based off their current lifestyle and expenses.
For example, two prospective buyers each with a $200,000 pre-approval loan may look at two different homes. One buyer may find a $200,000 home on which they put 5% down which would leave them with a $190,000 mortgage and no additional funds after closing. The second buyer may come across a $220,000 home that they still put 5% down on, meaning they have an $209,000 mortgage. With less than $20,000 available to them in their reserve account, the second buyer may not have enough money to cover their other expenses.
This highlights the importance of factoring in all of the expenses when considering a pre-approval loan amount. Potential buyers can’t simply base their budget on the pre-approval number and must factor in all of their living expenses and lifestyle choices to arrive at a budget.
Final Thoughts
Buying a home is one of the biggest financial decisions someone will make in their lifetime. That is why budgeting and sticking to that budget is one of the most crucial steps in the home buying process. If buying a house is in someone’s future, understanding their loan pre-approval, calculating their monthly expenses and creating a financial plan is integral in the process. With this knowledge and appropriate budgeting, those in the market for a house can arrive at the perfect home for them.
