Contemplating the possibility of homeownership can be exciting. Contemplating the prospect of budgeting for a home? Not quite as thrilling. However, getting your finances in order before shopping for a house is an important step along the journey to homeownership.
Budgeting for a Home
Budgeting isn’t a particularly popular pastime. CNN Money reports that only 40 percent of Americans use a budget. However, budgeting is an excellent way to get a clear picture of your finances. It allows you to see how much money you have, track where it is going, and identify places where you can reduce your expenses and increase your savings. Budgeting for a home before you buy one allows you to make informed choices, helps you strengthen your financial situation, and makes it easier to move forward with confidence as you position yourself to join the ranks of homeowners.
How Much House Can You Afford?
When you’re creating a budget for homeownership, being realistic is crucial. Determining how much house you can actually afford is part of this. Investopedia suggests using the following method to figure out how much house you can handle:
- Calculate your household’s after-tax income for the average month.
- Total your expenses for the average month, excluding only your current housing costs. Include all other necessary, flexible, and optional spending as well as any planned saving.
- Determine how homeownership will change your spending. Estimate new expenses that you’ll incur as a homeowner. Figure out which expenses homeownership will reduce or eliminate.
- Crunch the numbers to calculate how much you can afford to devote to housing. Add or subtract the expected changes in your spending from your monthly spending to determine how much you’ll likely spend each month as a homeowner. Then, subtract your revised monthly spending from your monthly income. The answer that you reach is the monthly housing payment that you can afford.
- Determine how much you can afford to spend on a house by plugging your monthly housing payment into an online mortgage payment calculator. Play with various interest rates to explore the possibilities.
To make this process a little simpler, use our How Much Home Can I Afford? calculator.
Minding Your Credit
Securing a lower interest rate means that you’ll pay the lender less for the privilege of borrowing money. What can you do to improve your chances of qualifying for a great rate? Make sure that your credit is as shipshape as possible. Forbes suggests several strategies, starting with reviewing your credit report and clearing any errors. Staying current on your bills, paying down debts, and avoiding new debt can also help improve your credit score and your appeal to lenders.
Building Up a Down Payment
As The Mortgage Reports makes clear, with home loan programs that require little or no down payment readily available, you don’t have to have a huge down payment saved up in order to buy a home. However, having the funds available to make a down payment gives you more options. It’s a good way to demonstrate your financial stability to lenders, so it may help you qualify for a loan with a better interest rate and other favorable terms. Plus, the ability to make a down payment can make your offer more attractive to sellers, increasing your odds of a successful bid. It’s also worth noting that making a down payment reduces the amount of money that you have to borrow, minimizing the amount of debt that you’ll take on and the total amount of interest you’ll pay over the life of your mortgage.
Preparing for Closing Costs
A down payment isn’t the only reason that prospective homebuyers need cash on hand. As Forbes explains, closing costs normally total between two and five percent of a property’s purchase price. In some cases, you may be able to roll some or all of the closing costs into your mortgage, but it’s smart to have the funds ready in case they’re needed.
Saving for Future Expenses
Buying a home is a major expense, but it shouldn’t drain all of your funds. Savvy homebuyers know that it’s wise to have resources set aside for emergencies and other unexpected expenditures. Having an emergency reserve can also make you look financially responsible to lenders. In fact, some lenders consider it a necessity. As Money Under 30 reports, some lenders require that borrowers have a cash reserve equal to at least two months of mortgage payments.
Since 1986, PrimeLending of Springfield, Missouri, has helped more than 500,000 homeowners buy, make improvements to, or refinance their homes. We guide our clients through every step of the mortgage process, providing valuable insights, clear communication, and effective service along the way. We can even assist you with budgeting for a home. Contact us today to schedule an appointment.