Many buyers, especially first-timers, worry about how to budget to buy a house -- and it’s not hard to see why.
Becoming a homeowner is a huge financial commitment, and it only makes sense that you’d want to feel fully prepared before taking the plunge. Luckily, with a little planning and foresight, you can easily make that happen.
Read on below to learn more about how to appropriately budget to make your homebuying dreams become a reality and enter the process with confidence.
1. Get a pre-approval
We’ve said it before, and we’ll say it again: getting a pre-approval should always be the first step in your home search. Put simply, this document will not only help you clarify the maximum amount of money you have to spend -- which is the first step to creating any budget -- but it will also help let sellers know you’re a serious buyer.
Start by researching reliable lenders in your area. Then, go in to one or two with the appropriate documentation in hand.
- Two years of W-2’s (Or, high-net tax returns, if you’re self-employed)
- Your most recent pay stub, preferably showing your year-to-date income
- Quarterly statements for your assets like bank accounts and 401Ks
- Debt records for any credit cards or outstanding loans
Once your lender has had a chance to verify these documents, he or she will provide you with your pre-approval, which will show the maximum loan amount you're eligible for. In the event that number isn’t where you’d hoped it would be, he or she may also be able to provide you with advice on how to strengthen your financial situation.
2. Use a mortgage calculator
Once you know the maximum amount that you’re able to put towards a home, the next step is to figure out how much you’re actually comfortable with spending on a monthly basis. Remember, pre-approvals only take into account your overall debt and assets, not any quality-of-life expenses like food, medical expenses, or entertainment.
To do this, you’ll use a mortgage calculator. They give you the opportunity to see what your monthly mortgage payment will be at various loan amounts and interest rates. After you’ve found a payment where think you’ll be comfortable, go ahead and plug that number into your regular, household budget. Doing so will give you a much clearer picture of how undertaking a mortgage of that size will affect you on a daily basis.
3. Research prices in your area
Next it’s important to see how far that money will go in your particular area. For this, we recommend using apps like Open Listings, which lets you create searches and set alerts for available properties in your area that will suit your needs.
Take the loan amount that you’ve decided upon when using the mortgage calculator, and set it as your max sale price. Then, fill in other relevant criteria like your desired location and the total number of bedrooms and bathrooms you’re looking for, plus any other must-have features. From there, you should be able to start looking at properties in your price range.
However, here’s where it’s crucial to be flexible: odds are you won’t find a completely ideal home within your self-imposed budget. So, you’ll need to make some tough decisions. Ask yourself if it's worth raising the budget to find homes that better suit your needs, or should you make some compromises with my search criteria in order to keep it affordable? Then, make adjustments accordingly.
4. Don't forget supplemental costs
Lastly, keep in mind that your future mortgage payment isn’t the only expense you’ll should be budgeting for. As a prospective homebuyer, you’ll be responsible for providing a down payment, paying for your inspections, and covering closing costs, which typically amount to 1-2% of the sale price.
Then, you should also be sure that you’re financially stable enough to handle the costs of homeownership that come after you get the deed, such as utility costs, property taxes, and maintenance and upkeep fees. It may seem overwhelming at first, but home ownership offers many additional financial benefits (and emotional ones, too).