It doesn’t matter whether you’re buying a house to live in or buying one with the intent of turning it into a rental property - purchasing a home is a big deal. The process takes a lot of forethought and planning, both on the part of the buyer and other entities like banks, realtors, and lawyers. It’s not something to take lightly, and it’s certainly not something you should just jump into without making some careful considerations.
While there are many details to be aware of throughout the home-buying process, the most important by far is your budget. No good can come from going over budget. In fact, overspending is one of the biggest mistakes homeowners make. So instead of jeopardizing your emotional and financial happiness by guessing how much you should spend on a house, it’s best to develop a real estate budget before you even start looking.
Budgeting for Homeownership
Now that you’ve considered some of the random expenses associated with homeownership, you can really start taking steps toward developing your final home-buying budget:
1. Calculate your monthly income
This should include the total monthly earnings for each working/contributing household member, as well as any other additional sources of income you may have, like part-time jobs, social security, retirement income, etc.
2. Do the mortgage math
A good rule of them is to make sure that your mortgage payments do not exceed 25% percent of your income. So, once you have your total income, multiply it by .25 and you’ll have a good idea of what your monthly mortgage payment should be after your down payment is put down.
3. See how your mortgage fits with your monthly expenses
Make a list of your current expenses, including utilities, groceries, childcare, transportation, etc. Then combine your monthly expenses with your estimated maximum mortgage payment and subtract that number from your total monthly income.
4. Make adjustments as necessary
If the calculation above left you with room to spare, then you’re in good shape. However, if this number was bigger than your monthly income and left you in the red, you’ll need to trim the fat, either by reducing your monthly expenses or by decreasing the amount you’d be willing to spend on monthly mortgage payments.
5. Factor in your down payment.
Now that you’ve got a handle on your projected monthly expenses, we can discover exactly how much home you can afford. Thankfully, there are plenty of mortgage calculators to help you out. All you have to do is plug in how much money you’ve saved for your down payment along with the maximum value of the homes you might be interested in until the number under “total monthly payment” matches your target monthly mortgage cost.
If you’re having trouble getting the numbers to match, you’ll either need to increase your down payment or look at homes that are a little less expensive.
Things to Consider When Buying a House
Monthly income and expenses are certainly the largest components of developing a budget, but they aren’t the only ones. As you are working on budgeting, don’t forget to think about the following:
Job stability. Have you been at your job for a while? Is there any chance you could lose your job or switch jobs anytime soon? These are all things you should mull over before making any major purchase.
Your future. Are you planning on having kids soon? If so, are you going to want to save for their college? Or maybe you’re planning a wedding in addition to buying real estate. It’s important when house shopping to remember to look at the big picture, and how your life/finances may change down the road.
Utility costs. Your utility bills are bound to change when moving into a new home. You might use more/less water and electricity, or you might have to pay for waste or pest control services that you didn’t before.
Appliances. Not all new homes come with all the appliances you want. Others may come with appliances that are old or broken and need replacing. Regardless, you should make sure you have enough money to cover the cost of major appliance replacements.
Home repairs. Finding the perfect turn-key home in your budget may be ideal, but it’s not always realistic. Chances are, the home that you settle on will need a repair here or there, or maybe a new coat of paint or new carpet.
Closing costs. The money-spending portion of home-buying isn’t over until you’re sitting at the closing table. And, unfortunately, there are a lot of bills that have to be paid to get you there, like appraisal fees, home inspections, credit report fees, and so on. Closing costs can equal up to 5% of the cost of the home, so don’t forget to work them into your plan.
HOA fees. Communities with lots of amenities tend to foot the cost by instating homeowner’s association fees. While these usually aren’t a huge concern, it’s definitely something to ask about before you settle on a home.
Credit score(s). This is absolutely something that will factor into your ability to get a loan and/or buy a loan, so if your credit score isn’t in good shape, you might want to spend some time working on it before you start house shopping.
Furniture needs. A new house doesn’t do you much good without furniture to enjoy. Chances are that, when you move, you’ll need to replace at least a few pieces to fit the new space, so budget accordingly.
The best plan for handling the last-minute expenses of home-buying is to multiply your monthly expenses times three and make sure you keep at least this much money in your savings account at all times.
The Importance of a Real Estate Agent
The internet is a good place to start looking at homes, but ultimately you’ll want to go visit some in person. For that, you’ll need the help of a realtor. The Wilmington realtors at Network Real Estate can also help you during the budgeting phase of your search to make sure you find a property that meets your needs and your budget.
Remember, as a buyer, there’s no risk associated with working with a realtor since the seller is traditionally the one responsible for paying all real estate agent fees. So what are you waiting for? Check out the houses we have for sale in Wilmington and the surrounding areas, or give us a call to speak to one of our realtors at 800-747-1968.