Before entering the market and making offers on a home, it is important to know how much house you can afford and the expenses to consider beyond the asking price.
Be realistic about what you can afford
Before starting your house hunt, it's important to know what your total expenses are besides just the mortgage. List out all your monthly expenses and remember to include items like car payments, student loans, groceries, and transportation along with discretionary spending such as dining out, going to concerts, and shopping for new clothes.
A common rule of thumb is that housing costs shouldn't total more than 30% of your before-tax income. This percentage can vary widely between buyers, especially if you are paying down other debts like student loans or car payments. Overspending on monthly housing payments can leave homeowners “house poor” and unable to meet other important expenses – like saving for retirement.
Many buyers get pre-approved for home financing early. While that is helpful for understanding your mortgage budget limitations, just because a bank approves you for a certain amount, it doesn't always mean that is what you should spend. Stick to a price limit you're comfortable with after considering all monthly bills.
Include a buffer
While it may be tempting to throw all you have at your offer to get into a home, plan to have at least some money left over after you close on a home. Experts advise having at least three to six months in savings the day you become a homeowner. One reason is that you will need emergency savings now more than ever. That means having some money set aside for unexpected car repairs or medical expenses. If a home purchase leaves you with no liquidity, it might be worth considering waiting to increase your savings or lowering your price point.
The true cost of owning a home
While the down payment tends to be the biggest initial hurdle for many, there are several other costs of buying that are part of the process: appraisal, origination, credit report, and notary fees. These can all add up quickly if you don’t plan accordingly. Fixing up rooms, furnishing your new home, and taking care of your yard are costs to consider. In addition, utility bills can be higher than you may have been used to as a renter. This is where making a list of expected costs and improvements can help.
Renovations are not always as small as they seem
Buying a fixer-up might allow you to snag a bigger home or afford one in a more desirable area, but experts warn that there are financial risks to this decision.
If a home needs improvements, factor that into the total cost of buying. Many new owners tend to underestimate how much renovations will cost. Getting a loan is an option to finance the project, but can sometimes be difficult to secure, especially after you have just taken out a mortgage. Some mortgage options include renovation expenses. For example, an FHA 203(k) loan allows homebuyers to finance the sale and rehabilitation on a single mortgage.
The key is to approach your purchase with the big picture in mind. Starting out with a realistic understanding of planned and unexpected expenses will not only reduce potentials risks and stress, it will help you to settle into your new home with a feeling of confidence and preparedness.