Are you financially prepared for homeownership? Choosing to buy a home is the biggest financial decision most Americans will ever make, so gathering and analyzing information is crucial. Here are a few factors to consider in your budget before buying your dream home.
How to budget for a new home
Calculate your net income
Chances are you know your pre-tax salary, but you also need to know your expendable cash flow. You can consult your tax professional if you have one; otherwise, look at your pay stubs to see at what rate you are taxed. Dust off your old calculator, or find one online1 to get your true take-home salary.
Add up all monthly expenses
This important step can be done easily if you use a debit card for all your purchases. Simply log into your online bank account and go through the charges. Some banking websites will even add up the totals of your spending and categorize it (i.e., how much you spend on food, utilities, etc.). If yours doesn’t, you should categorize your spending yourself. This can help you see where you can cut your monthly expenditures. For example, many people could save money by eating out less and canceling unused subscriptions.
Eliminate current debt
The general consensus among financial experts is that debt payments (from any source) should not exceed 36% of your gross income.2 So if you have significant debt from credit cards, student loans or another loan, paying them down can empower you to afford the home you want.
After paying down your debt, you need to save up for a down payment and other expenses. Many aim to put down between 10% and 20% of the home’s sale price for your down payment. If it’s under 20%, you may need to carry mortgage insurance, which will add to your overall monthly payment. Put as much as possible into the down payment to lower your interest over the course of the loan.
Account for hidden expenses
The true cost of buying and owning a home can be more than you might expect. You need to account for things such as maintenance, local property taxes, homeowner’s insurance, emergency funds, and closing costs. And, while bigger houses are nice, if you’re used to apartment living, the increase in utility costs may come as a shock. Don’t overlook these hidden costs, as they add up quickly and could put a strain on your finances.
Following these steps can help prepare you to buy a home. We recommend getting preapproved by a lender prior to house shopping. This gives you leverage in negotiations and helps you truly understand your financial health. Craftmark Homes has a number of lenders we work with who are happy to consult and find the best loan program for your home buying needs.
We’re experts at getting people into their dream homes. We’ve been a premier home builder in the Washington, D.C., area for over 27 years and have built a sterling reputation. Craftmark Homes takes pride in quality craftsmanship, luxurious floor plan designs and prime locations for our communities. If you’re interested in seeing your options, contact us today for a consultation.