So you’re looking into buying a new home, maybe even your first one. That’s great! Purchasing a brand new or new-to-you home to call your own is one of the most exciting changes in life– and among the most frustrating. The back and forth between buyer and lender is a dance many detest, but with a little preparation you’ll be ready for anything! If you know the ins and outs of your budget, and the threshold of debt you are capable of taking on you can walk into the home buying process with confidence. If you’re interested in how to budget for buying a new home, keep reading. In four simple steps, we can get you there!
Step 1: Calculate what you can afford
There’s no one set way to do this, but the method investors (like the ones at Investopedia) swear by is called the “28 percent rule.” It goes like this: your future mortgage shouldn’t be more than 28 percent of your gross income each month. There is some wiggle room, however, with many feeling comfortable at up to 31 percent. This figure is very personal to your financial situation.
Have a seat, crunch the numbers, and see what feels right to you. Consider every last expense you might have, not just your pre-existing bills and debts. Think about the plethora of costs that come with buying and owning a home.
Here’s a list of a few things new homeowners should remember when setting their budget:
- Homeowner’s insurance
- Utilities
- Repairs
- Maintenance
How can you prepare?
These things may sound obvious to some, but they can take even the best of us by surprise. Try making your own list of all the bills you anticipate popping up and how much they might cost. You can’t always know for sure how much the utilities will run you as this is different in every home. However, you can try and determine what types of utilities you will be paying for.
There are the usual suspects such as electricity and water, but maybe there is something about the homes you are interested in that run differently from the rest. Perhaps there are HOA fees or even trash collection fees. Things like that can be different in each neighborhood, be sure to account for these variations so you’re not stretched too thin on your budget. It can’t hurt to overestimate your expenses!
If you plan on buying a home that’s going to need some love, this is where that overestimation habit comes in handy. Repairs on any home can be unpredictable, and if you don’t prepare for this you could quickly find yourself in a money pit. It’s good practice to set a repair specific budget and use this in conjunction with your main budget to help you decide what you can afford.
Once you have that number within a good comfortable range you should next consider your down payment.
Step 2: Down Payment
Ideally you’ve been saving money for a while in preparation for buying a home. Maybe it was your savings before you even realized what you were saving for. In a perfect world, you could put down at least 20 percent of the cost. While this would save you money in the long run on interest, it’s not an option for many home buyers. However, sticking between the 10-20 percent range can still keep you of interest to lenders.
Step 3: Apply for a loan
If this is your first time buying a home, you should look into applying for a first-time homebuyer loan. This is through the Federal Housing Administration (FHA), and is a government backed mortgage loan with more lenient financial requirements. You could pay as little as 3.5 percent down and less in closing costs.
Even as a first time home buyer, you still have the option to apply for a private loan if you so choose. It will have stricter financial requirements, likely needing a down payment in the 10-20 percent range as discussed above, but putting more down means paying less in interest over the course of the loan.
Step 4: Put in an offer
Now comes the exciting part! You’ve done the math and calculated what you can afford. You’ve been pre-approved by a mortgage lender, and you have the necessary funds for a down payment and closing costs. The time has finally come for you to find the house of your dreams, and put in an offer!
Okay, maybe just your favorite house that’s within your budget. Either way, you’ve put in the work so you can keep the stress down and the excitement up. This part of the home buying process will come with many ups and downs, but so long as you’re prepared you can rest assured knowing you’re on the right path.
We know that buying a new home is a large and often scary financial commitment! Maybe you are jumping in and buying a fixer-upper. Repair costs will be high, but you can customize the renovations to your exact wants and needs. Perhaps you are buying a home in an entirely new city. There are a lot of big decisions you will soon have to make. However, if you know what it is you’re looking for and how you’re able to achieve it, you will undoubtedly go far!
And if it just so happens you need new windows and doors, Castle Windows has you covered with trustworthy installers and an amazing lifetime warranty. Click on the Castle Windows logo at the top of the page to get a free estimate!
Happy home buying!
