Being a first-time homebuyer can be both exciting and challenging, especially when it comes to wrangling up the necessary funds not only for a down payment but for the ensuing household budget as well. While an experienced real estate agent can offer advice and assistance to help first-time homebuyers determine if they can actually afford the house of their dreams, Forbes offers these additional tips on where to start when it comes to creating a budget for a new home.
Evaluate current housing budget
First-time homebuyers should consider how comfortable they are with their existing rental budget, and how that budget impacts other life desires and needs such as traveling and starting a family. If the rental budget is comfortable for them, then it likely will be a comfortable budget for a mortgage, factoring in all expenses including a budget for repair savings.
Research homes online to see what’s available. Then make a list of must-have features and preferred neighborhoods. While it’s good to set expectations and know what you want, you also don’t want to be unrealistic with your expectations. There’s no such thing as a perfect home, meaning you could be forced to compromise.
Document your spending habits
You might discover that you have some spending habits that are keeping you in debt. Think about implementing some changes that will leave you with less debt and expenditures, and ultimately, the ability to buy a home.
Begin with the end in mind
Don’t start your search based on a purchase price or how much you’re approved to spend. Focus instead on what you’d like your monthly payment to be (including property taxes, insurance and condo fees). Next, decide on how much cash you have for the transaction. Bring those two numbers to the lender and ask them to tell you what that means for a purchase price. It’s typically not what you think.
Start with you
Purchasing a home can be daunting, so have an honest conversation with yourself before you do anything. Establish some expectations and set some goals, because chances are you’re not going to get everything (property, payment, neighborhood, interest rate, etc.) that you want. Lenders and real estate professionals can serve as great resources when it comes to prioritizing and weighing your options.
Consult a mortgage lender
Many people assume that they can obtain a certain loan amount based on their income. When they receive their pre-qualification letter from their lender, however, it sometimes is a lot less than they had hoped. Consult a mortgage lender who can research your financials and determine how high of an approval for a loan you can obtain, and then use this information to set a budget.
Knowing your price range
When creating a budget for a new home, you should first identify your price range. Know how much you need to save for a down payment and whether you can afford the mortgage. Then determine if you have enough money left over for closing costs and even for potential home improvements, depending on the type of house you want to buy.
Assess needs vs. wants
A real estate professional can give first-time homebuyers a complete short tutorial on the entire purchasing process, with the first step being needs vs. wants. After a buyer’s needs are met with considerations such as number of bedrooms, commute time to work or desired schools, the agent can move them into the wants category—including a backyard pool, cul-de-sac lot and three-car garage, for example.
Determine what you can comfortably afford
Be sure to deduct a reasonable percentage of income for saving and investing, other bills, a social life and emergencies. Ideally this number will be 30 percent or less of your monthly income, which will have to cover the mortgage, insurance, taxes, maintenance, association dues and utilities. Then try to stay under that percentage when you’re shopping for a house.
Save for a down payment
This can be the biggest hurdle a first-time buyer needs to overcome. Getting pre-qualified is a great way to determine how much you’ll need for a down payment, and chances are that it will be more than your current rent. Budget your mortgage amount for six months to make sure that you can truly afford it, and then put the savings into an account to use for your down payment.
Think short-term pain and long-term gain
It’s always tempting to look at that picture-perfect home, but that can be a trap. Instead, seek out properties that have cash flow with rental suites in the basement or on the property. If that isn’t an option, go for the least attractive home in the best neighborhood that has the best chance to appreciate with a little TLC.