How to Properly Calculate Your Home Buying Budget
When you're ready to enter the real estate market, you need to know your home buying budget. It's not as simple as speaking to a lender and getting pre-approved for a mortgage. While this can help, your lender doesn't know your monthly budget and what you're comfortable with.
Preparing to buy a house is an exciting time. However, it can cause a ton of stress if you shop outside your budget. Let's look at some of the best tips to help you calculate your home buying budget.
5 Tips to Calculate Your Home Buying Budget
1. Consider Your Monthly Budget
If you're a first-time buyer, you will want to look at more than just how the mortgage payment fits into your monthly budget. It's also important to figure out how homeowner's insurance, taxes, and maintenance fit in.
While your current rent payment can help you figure out your mortgage payment, it's only a gauge. Make sure you consider a lower payment since your current rent is probably covering the mortgage payment, insurance, maintenance, and taxes for your landlord.
2. Figure Out Your Debt-to-Income Ratio
You want to know your DTI before you enter into the home buying process. Your lender will figure this out, but they will likely only use what's on your credit report. You may have other bills you pay that don't show up on your credit report.
Regardless, you want to know that lenders want to see a ratio under 36% and your mortgage should be 28% or less.
3. Figure Out ALL The Math
There is plenty of math to do other than just plugging in your new mortgage payment. You have to look at property tax rates, insurance rates, any homeowner's fees, the cost of utilities, the cost of internet, and even the estimated cost of maintenance.
Don't let these expenses surprise you. Figure them all out the best you can and fit them into your budget.
4. Use an Online Mortgage Calculator
You can use one of the many online mortgage calculators to figure out the payment you will have. This can help you get an idea of your home buying budget, but it's just one aspect of the process.
These calculators can help you figure out the mortgage payment on a specific mortgage amount, at a specific interest rate.
5. Figure Out Your Down Payment
The more you put down, the less you finance, and the lower your mortgage payment will be. You want to know what you should put down on a home and keep saving to reach the goal. If you can put 20% down, you can avoid private mortgage insurance, which is an extra cost that you will have to factor in, if you put less down.
There are many things to consider when calculating your home buying budget. You have to look at more than just a comparison of your rental payment to your mortgage payment. Owning a home comes with other expenses you have to consider. Make sure you get pre-approved but make sure you actually look at your monthly budget, too.