Homebuyers: Finding the Housing Budget That’s Right for You
First time homebuyers usually start dreaming about the perfect house long before they start thinking about the budget. Most Americans aren’t in a position to pay cash for a house, so that means obtaining a mortgage. This, in turn, means deciding on your housing budget is going to be slightly more complicated.
If homebuyers spend more than you should on your house, you will not enjoy your purchase as much because you will not have the funds that you need to live comfortably. Here are some things for homebuyers to keep in mind when deciding what a realistic housing budget should be for you.
What Can You Afford?
One of the main things that you want to consider when deciding on a budget is how much you can actually afford to pay. Lenders decide this by looking at your debt-to-income ratio. To determine what your ratio is, simply add up all of your debt that you pay every month.
This includes car payments, student loans, credit cards, and similar items. Then you divide that number by the amount of income you have each month. The answer is your ratio.
Lenders do not want to see your ratio go above 36%. When you are initially adding your ratio up, you are not including a mortgage payment in your numbers. Homebuyers can begin to use any of the mortgage payment calculators online to start playing with the numbers.
Remember that you will be paying taxes and insurance along with your property, so find a calculator that will include those estimates in your total.
What Else to Consider?
While your debt-to-income numbers are important, they do not give you the full picture. Take into consideration how much money you are spending on things other than your debt every month. Think about what you enjoy doing and spending money on.
If you are a person that really enjoys taking luxury vacations each year, you may not want to give that up. You may want to keep your ratio after you purchase a house well below the 36% standard to ensure that you can still afford to enjoy your hobbies each month.
Many first time homebuyers make the mistake of using the number that a lender pre-approves them for as their budget. They then spend the entire amount, trusting that they will easily be able to afford it because the lender approved them for that amount. They only find later that their mortgage is much higher than they would have liked and find themselves “house poor,” meaning they are putting so much money towards their house that they do not have enough leftover to live the way that they would like.
Setting a budget as homebuyers is crucial to your financial future. Once you have established a budget you need to make sure you stick to it. It’s easy to fall in love with a beautiful house that is over your budget and talk yourself into buying it because it isn’t that much more. This can lead to frustration and difficulty once you begin making your payments. Stand firm in your budget once it is established.