How to Budget to Buy a House
If you are thinking of buying a home you need to carefully prepare a budget in order to reach your goal of home ownership. Many people think purely in terms of the down payment when calculating a budget but there are also significant closing costs which include insurance, property taxes, an appraisal and very often mortgage premium insurance. In addition to the upfront costs, you need to ensure that you can afford the monthly payments.
- Difficulty:
- Moderately Challenging
Instructions
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Gather your most recent pay stubs and bank statements. Go to a local lender to get pre-qualified for a loan. The lender will look at your debt-to-income ratio and your credit score. Generally your debt-to-income ratio cannot exceed 45 or 50 percent of your gross monthly income and your mortgage payment cannot exceed 30 percent of your gross monthly income. Some mortgage programs require borrowers to have FICO scores above certain levels, so based on your score you may or may not qualify for a low down payment loan. Keep a copy of the pre-qualification letter that the lender provides because it shows you the amount you can afford to spend on a house.
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Review your bank statements. The pre-qualification letter shows you how much of a down payment you must provide. Typically down payments range between 3.5 and 20 percent. To determine the exact amount of your down payment, divide the down payment percentage required into the total loan amount you are approved for. To determine how much you must save, deduct any savings that you have from the total down payment you need.
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Look through your bank statement and mark off essential expenses such as utility bills and rent. The other expenses are discretionary spending. Carefully consider which discretionary expenses you can afford to eliminate. Many people cut magazine subscriptions or cable TV. Set up a savings account and transfer the money you normally spend on discretionary items into the savings account after each pay day. By dividing the down payment needed by the monthly savings contribution you can determine how long it will take to reach your goal.
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Ask your lender to give you an estimate for the typical closing costs for a home of the price you have been pre-qualified for. Add the total amount of those closing costs to your monthly savings contributions. You can also withdraw up to $10,000 from a Roth individual retirement account to cover closing costs. If you have such an account, consider using proceeds from it to speed up the home-buying process.
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Tips & Warnings
You can decrease your total debt-to-income ratio and therefore increase the amount you can spend on your mortgage payment if you pay off existing debts. Remember that this means it will take longer to save for a down payment because your money will cover debt rather than go into your savings.
Make sure you pay existing debts on a timely basis because any decrease in your credit score could cause the down payment requirements to rise. Additionally, mortgage requirements are subject to change so keep in touch with your lender if you plan on saving for an extended period of time.
