While many people dream of owning a home, homeownership can become a financial nightmare if you make the mistake of spending more than you can truly afford. How do you figure out how much you can reasonably spend? With mortgages, interest rates, credit scores, debt-to-income-ratios, down payments, and other factors in play, it’s impossible to determine the answer with a quick glance at your finances. Budgeting for a house is certainly doable; it just takes a little work.
Preparing to be a Homeowner
For aspiring homeowners, preparation can really pay off. It’s vital that you educate yourself about a few financial basics (like credit scores, debt, savings, budgeting, and debt-to-income ratios), and how they impact your ability to secure a mortgage (source). Once you have a good understanding of these concepts, put your knowledge into practice to ensure that you are financially ready when you decide to buy a house. For example, you can do the following:
- Be responsible with your money. Pay bills on time and keep your balances well below your credit limit.
- Build a strong credit history. A great credit score will help you obtain a lower interest rate when you apply for a mortgage, reducing the total cost of your loan.
- Create a budget. While the idea of budgeting often elicits groans, a budget is a useful tool for keeping track of your money. The information you’ll gather enables you to consciously work toward your financial goals.
- Be mindful of debt. Lenders like to see that you can manage your debt competently. If your debt-to-income ratio is more than 50 percent, you need to pay down your debts.
- Build your savings. Cultivating a savings habit reassures lenders and helps you put together a down payment. Consider setting up an automatic transfer to your savings account, so that saving money is something that you don’t even have to think about.
Budgeting for a House
As Frugal Rules explains, affordability is a crucial factor when purchasing a house. After all, you’ll be making mortgage payments for a long time, and you need to be able to do so comfortably. While preparing to be a homeowner by being proactive about your finances is a good start, it doesn’t reveal how much house you can honestly afford. That’s where budgeting for a house comes into play.
Plan for a Down Payment
How much of a down payment do you need to have saved before you can start shopping for a home? As described in the video above, that depends on several factors, including the type of loan that you’re using, the cost of the house, your closing costs, current interest rates, and whether private mortgage insurance is required.
Private mortgage insurance is a type of insurance that protects a lender against loss if a borrower defaults on their loan, and it’s an additional expense that you’ll probably be required to pay unless your down payment is at least 20 percent of the home’s purchase price, reports Investopedia. Eliminating the need for private mortgage insurance is a good reason to get serious about saving so that you can amass a significant down payment.
Determine an Affordable Mortgage Payment
The idea of what is affordable varies depending on your financial situation, so when trying to determine how much of a mortgage payment you can truly afford, you need to examine the particulars of your unique financial situation. When budgeting for a house, popular financial guru Dave Ramsey suggests the following steps:
- Determine your monthly income. Identify all sources of income and add up what you receive in a month.
- List your current monthly expenditures and add them up. Include all of your living expenses, your medical expenses, your deposits into savings, and the amount you spend on recreation. Basically, if you spend money on it, it should probably be included.
- Calculate how owning a home will change your monthly expenditures. Some costs will go up; others will go down. Estimate carefully so that you have a reasonably accurate picture of what homeownership will cost. This can help you see what an affordable mortgage payment is for you.
- Plan for future growth. Change is a part of life, and many life changes are expensive. Think about your future goals and their costs.
- Adjust your budgeting as necessary. Play with the numbers until they add up in a way that you feel comfortable with. Be honest and accurate, and you’ll have a fair idea of what you can afford to spend on a mortgage each month.
See What You Qualify for in a Mortgage
Before you start hunting for a house, it’s smart to see what you qualify for in a mortgage. Your debt-to-income ratio is a major factor in determining what programs you qualify for (source). A loan program has a qualifying ratio that sets a limit on how much of your monthly income can go to your monthly mortgage payment and how much can go toward your total debt. Talking with a financial professional about (1) the loan programs for which you qualify and (2) the amount to which that translates in terms of a mortgage payment will give you a clearer picture of your buying power.
Budgeting for a house is complicated, but you don’t have to figure it out alone. If you are ready to buy a house and you live in the Kansas City area, contact PrimeLending today. Our team is committed to helping you navigate the home financing process, so that you can purchase the home of your dreams. At our branches located throughout Kansas City, we can help you explore our wide variety of loan products and programs. Plus, PrimeLending utilizes delegated underwriting, local appraisers, and cutting-edge technology to accelerate the underwriting and closing processes. When you’re ready to learn more, please give us a call at 844-701-5626.