Buying a house is one of the biggest and most important in many people’s lives, which means that it is not something that can be done on a whim. It takes a lot of planning, especially for people who are buying a house for the first time.
There are factors to consider, like the location of the house and the size. The biggest factor, however, is the budget because that determines if you get your dream or compromise.
1. The 28% Rule
This is one of the simplest ways to calculate and set a good budget when buying a house. The rule states that your mortgage should not exceed 28% of your monthly gross income. That will help you settle your mortgage payments and other debts you may have without squeezing your finances.
Also, it helps you get the mortgage easily because mortgage lenders consider your debt-to-income ratio, and the lower the ratio, the higher your chances of getting the mortgage.
The first thing you need to do is determine how much your income is after tax and other deductions.
2. Factor In Other House Expenses
The monthly mortgage payments are not the only recurring costs you have to consider when making your home-buying budget. You have to think of other costs you have to incur regularly like;
• Utilities such as water, electricity, internet, garbage collection, pest control, and phone services.
• Property taxes and homeowners insurance.
• Repair and maintenance costs.
Identify all these expenses and estimate how much each of them is going to cost a month. It is important to inspect the house for any damages and identify any repairs or maintenance work that needs to be done. That makes it easier when calculating the repair and maintenance cost.
You also have to think about the closing costs, which usually range from 2-5% of the house purchase price, and factor them in your budget.
3. Determine The New Disposable Income
While the monthly mortgage payments may appear less than the previous rent, the additional hidden costs you have to pay like homeowners insurance, property taxes, and utility expenses may leave you paying more for your house.
That may mean that you have a lot less money left over than you previously did. It is important to determine how much leftover money you can comfortably manage to pay for daily expenses like groceries, fuel, or bus fare.
You also need to have a clear line between the things you need and the things that you can do without and change your spending plans. You must be willing to give up some of the things you don’t need and cut off the spending on other essential things.
Go for a budget that will leave you with more or equal disposable income to what you usually had.
4. Consider The Down Payment
How much money you are willing to pay as a down payment will influence how much you will have to pay every month. The higher the down payment, the lower your monthly payments will be.
Therefore, it is important to save up for your down payment and go for a house where the money you have will exceed the expected minimal down payment. That will help you draw up your initial and recurring budget for your house.
5. Pay Off Your Debts
While clearing your debts can help you get approved for a mortgage, it will also help you to come up with a good budget for your home because you do not have to divide your money between paying the mortgage and settling other debts.
It will also make it more comfortable for you to allocate money to other house expenses and your daily needs.