Buying a home is an enormous commitment — especially if it’s your first one. The learning curve for real estate jargon is steep, and it’s easy to get sold on the amount stated on a lender’s mortgage pre-approval letter.
But the threshold of a pre-approval letter is hardly an accurate reflection of what you actually end up spending on your first home. To avoid biting off more than you can chew, set a realistic budget by following the tips below.
With this guide, a dream home that’s obtainable because it sits well with your other expenses is on the horizon.
- Factor in all income and expenses
It’s tough to gauge what you can afford if there’s no record of what goes in and out of your pocket. To gain some awareness, list your monthly income – salaries, commissions, and the like – and total them up.
Now create another list for all your regular monthly expenses, including money you set aside for savings.
Next, deduct your total expenses from your total income. If the amount you get is zero, all your money is accounted for and you are ready to start budgeting for a home.
- Stick to the 25% rule
Committing to a mortgage you can’t afford given your cost of living can be avoided by sticking to the 25% rule. This rule simply states that monthly payments on a home should never exceed a quarter of your gross monthly income. This is especially crucial if you are also settling other debts like student loans and car payments.
Mortgage lenders also look at a potential homebuyer’s debt-to-income ratio when deciding whether to approve a loan. If this ratio exceeds 43%, loan applicants have a high chance of getting denied.
If your finances aren’t aligned just yet, it’s better to start looking at less expensive homesas you pay off your outstanding debt.
- Downsize needs and weed out wants
Everyone dreams of buying their perfect home right away. But unless you have significant resources, this option may not be available to you. To get a great deal and still end up with a home that you love, think hard about your non-negotiables (needs) and separate them from your desires (wants).
For example, someone who works from home and loves to swim will ultimately recognize a study as a non-negotiable and a swimming pool as a desire. It would make more sense for them to invest in a home with a home office or an area they can turn into a dedicated working space. They can always head to the local or community pool to swim laps.
- Be mindful of additional and future costs
Aside from your mortgage payments, household expenses, and other debt, don’t forget to budget for insurance, taxes, maintenance, and additional furniture. The extra expenses are part and parcel of becoming a homeowner. And they require adjustments to your lifestyle, such as spending less money on clothes and scaling back on restaurant dinners or travel.
- Save up for the down payment
Better loan terms and interest rates are very accessible for homebuyers who can put down 20% of a home’s purchase value. It comes down to basic risk assessment. The more you pay upfront, the less money you have to pay over the life of your mortgage, translating to less chances of defaulting on the loan.
Ready to become a homeowner? With their experience and local expertise, the Pagnotta Homes Team can help you find the best home in Central New Jersey for your budget. Call Cindy Pagnotta at 908.436.7947 or send an email to info(at)pagnottahomes(dotted)com to make your dream home a reality.