Buying a Home Starts with Setting Your Budget

Bit by the home buying bug? If you casually browse through listings over your morning coffee or notice every “For Sale” sign you drive past on your way to work, you’ve got homeownership on your mind. But if the thought of a monthly mortgage payment is turning your home buying dreams into nightmares, it’s time to get real about your budget and how much home you can really afford.  

Whether you’re a first-time buyer, a growing family who needs more space or a downsizing empty nester, the buying process always starts the same—creating your new home budget. We’ve put together a quick guide on how to arrive at a number that works for you.  

Calculate Take-Home Pay for Your Household

First things first, you need to know how much cash you, and everyone who will be contributing to your mortgage, bring in each month. That means looking at your monthly take-home pay, or what you’re left with after taxes, health insurance, retirement funds and any other nontaxable deductions are taken out.  

If your paychecks are roughly the same amount each pay period, calculating your monthly take-home pay is pretty straightforward. But if you have an irregular income (for example, you work for yourself, put in a lot of overtime or are paid on commission), figuring out your monthly income is a bit trickier. In these cases, an average of your last 12 months of pay can act as your monthly income for the purposes of creating your budget.  

Factor in Your Current Monthly Expenses

Once you’ve calculated your monthly income, you’ll need to figure out where each of those dollars is going each month. If you’re using a budgeting app or spreadsheet to manage your finances, you may already have a good idea of where you’re spending your money. 

Otherwise, it’s time to dig into your bank and credit card statements, utilities and bills, and other monthly spending. Lump expenses into categories, such as rent/mortgage, debt repayment, food, transportation, medical, savings, entertainment, etc., and add up each line items to arrive at your total monthly spend.  

Aside from setting a budget for your new home, this step is an opportunity to take a closer look at your finances in general. Are you saving enough for retirement or planning for your children’s education? How much debt are you carrying? Is your iced-latte-a-day habit getting out of hand? Get reacquainted with your money and be honest with yourself—is it the right time to buy a home or do you need to address other parts of your finances first?

Estimate Future Monthly Expenses as a Homeowner 

Next, it’s time to preview what your finances will look like as a homeowner, and there’s more to consider than just a new mortgage payment. You may have to adjust your monthly spending to make room for costs like private mortgage insurance, property taxes and everyday expenses like utilities and transportation, which may increase when you move.

If you are buying a condo, townhouse or a home within a private community, you may also have to pay a monthly homeowners’ association fee. Plus, you’ll need to consider maintenance costs—if your AC goes on the fritz, you’ll need to find, hire and pay a repair service out of your own pocket. 

Keep in mind, buying a new house doesn’t always mean your expenses are going to go up. If you’re moving closer to work or downsizing your space, you can cut back on your monthly expenses and build a little room in your budget for that sectional you’ve been eyeing.  

Use Your Monthly Housing Budget to Calculate Total Home Price

Knowing how much money you’re bringing in and spending each month, as well as having a projection of what your expenses will look like in a new home, gives you an idea of how much room you have in your housing budget to cover a mortgage payment. With that number in mind, you can use a home loan calculator to determine the total buying price of a home that’s right for your budget. For example, if you’ve figured out you can afford a $1,000 mortgage payment, at a fixed rate of 3.5% over 30 years, you would be able to borrow up to $222,695 and stay in your budget. Of course, if you have a lump sum to put as your down payment, those numbers might shift.   

Remember, getting approved for a certain loan amount doesn’t mean you must buy a home that uses up every penny you’re offered. In fact, you may be approved for a home loan that’s much higher than what you actually want to pay in terms of a monthly mortgage, so it’s up to you to choose a home that fits the budget you’ve created for yourself. 

The home buying process doesn’t have to be a solo endeavor. Contact a mortgage advisor if you have any questions about budgeting for a new home, current rates on mortgages and help with every step of the buying journey.