Homeownership is a great thing, but it pays to be prepared before you make one of the most expensive purchases of your life. As you set out on the journey to buying a home, keep these six budgeting tips in mind.
1. Get Your Debt Under Control
Before you start out to buy a new home, it's a good idea to get your debt under control. Having a lot of outstanding debt will hurt your chances of securing a loan, or at best, will reduce the amount your lender will approve. Additionally, a mortgage will likely give you the largest amount of debt you've ever had, so the more small debts you can settle before taking that on, the better shape you'll be in as you become a homeowner with a monthly house payment.
2. Cut Expenses
Getting your debts paid off will help you free up money in your monthly budget, so that's a great start when looking to cut expenses, but if you find other costs to cut, you can free up more money to put toward your home. Analyze your spending habits and look for areas where you can eliminate or reduce costs. Cut down on convenience purchases, avoid late fees by paying bills on time, look for cheaper alternatives to services and memberships you subscribe to. Walk or bike rather than drive when possible. Anything you can do to free up room in your budget will benefit your financial situation.
3. Consider the "28% Rule"
As you prepare to seek financing for a new home, it may help you to consider the "28% rule."
As Donna Fulscado at Investopedia explains, "One of the easiest ways to calculate your home buying budget is the 28% rule, which dictates that your mortgage shouldn't be more than 28% of your gross income each month. The Federal Housing Administration (FHA) is a bit more generous, allowing consumers to spend as much as 31% of their gross income on a mortgage. But don't forget that if you have other debts, you must consider them in addition to the mortgage payment to determine how much you can truly afford." (1)
4. Save for a Down Payment
The size of your down payment can make a major difference in the rest of your home financing. If you can pay more upfront, you can probably reduce your monthly payments and the less you will owe overall. It can be difficult for some to come up with the money for a sizable down payment, but if you cut costs and save ahead of time, you can start your home-ownership journey in a better place.
5. Prepare for Home Ownership Expenses
Before becoming a homeowner, consider the costs that come with homeownership. There is much more to it than simply making your monthly mortgage payment. If you are used to renting, you are likely used to someone else handling maintenance. You may even have furnishings and appliances provided by your landlord. Depending on the home you purchase and your own personal preferences, you may have to spend quite a bit on repairs, upkeep (both inside and out), furniture, window treatments, floor coverings, appliances, landscaping, etc.
6. Be Realistic
House hunting can be very exciting as you see what's available and your mind goes over all the possibilities, but do yourself a favor and be realistic before you pursue a home that's out of your price range or that will cost you more than you can really afford in repairs or maintenance. Be honest with yourself about how much you can spend, including how much you can afford as a monthly payment and also how expensive of a home you can afford overall. If you overreach, you may find yourself in a great deal of financial trouble in the future.
For many, owning a home is a major component of the American Dream, and it symbolizes a certain degree of success. Prepare ahead of time and get a good understanding of what you're getting into as you budget for your new home.
1. https://www.investopedia.com/personal-finance/how-set-budget-your-first-home/