by Emily Hechler 
Whether you’re a first-time home buyer or you’ve owned a house before, the cost of owning a home will stick with you for years down the road. It’s important that you find a home that fits within your budget, so you don’t end up with financial strain or unnecessary debt. So, how can you determine the right home-buying budget? Here’s a step-by-step guide.
Know your gross monthly income. Your monthly gross income is the total amount you earn before any deductions. While your take-home pay is likely significantly less, your gross monthly income is the key factor in determining how much house you can afford as lenders use this figure to evaluate your borrowing capacity.
Consider your down payment. Some lenders allow first-time home buyers to make a down payment of only 5% toward their home although 20% is the typical down payment amount. This money will be due the day that you close on your house. If you are selling your current home before buying your next one, you can include the equity you’ve built on your previous home as part of the down payment for your new home. The larger the down payment, the smaller your home loan. This may also help you secure a lower interest rate. Either way, a larger down payment means that you’ll pay less toward the principal and interest each month, which saves you money over time.
Create a budget. If you don’t follow a budget, now is the time to start. A general rule of thumb is that you don’t want to spend more than 28% of gross monthly income on housing expenses. This includes your mortgage, homeowners’ insurance, PMI, personal property tax, and homeowners’ association fees (HOA). Keep in mind that you’ll have to spend money to keep your house in good condition. Factor in these maintenance costs too.
Estimate other up-front costs. When looking at potential homes, make note of any repairs that might need to be done. Sometimes, you can get the current homeowner to make repairs while you are under contract. In other situations, you might have a significant amount of work to do on the house. If the upgrades need to be made before you move in, you’ll want to have the money up-front to make these repairs to avoid taking out another loan. A new loan means you’ll have a higher DTI ratio, which could cause you to have a higher interest rate on your mortgage. In addition, you may have to pay for closing costs that typically range from 2-5% of the home’s sale price. This money will be due on the day you close on your house.
Evaluate the neighborhood. Some cities and subdivisions cost more to live in than others. You might find two comparable houses, but one is listed for $30,000 more just because the neighborhood is a more desirable place to live. Take this into account when searching for your new home. You might need to buy a smaller home if you want to live in a more desirable area. Or, you could get more house for your money if you move to a different neighborhood.
Keep running the numbers. If you have some wiggle room in your budget, or will have a higher income soon, evaluate the monthly costs of several homes. Use our home affordability calculator so you can calculate how your monthly payments will vary. This calculator doesn’t estimate additional fees like an HOA fee or maintenance costs, so you’ll want to factor in those costs yourself.
Consider the timing. The timing or your home search can impact both inventory and pricing. According to Zillow, a lot of houses typically go on the market in late spring offering a large inventory for you to choose from. By August, there’s still plenty of inventory, but the prices often dip. November tends to bring even lower prices, with many buyers purchasing closer to the asking price, though the trade-off is fewer options. Also keep in mind that closing on a house can take up to two months meaning you won’t be able to move in right away. Be sure to plan for temporary living arrangements during this time.
Now that you have the steps you need to create a realistic home-buying budget, you’re ready to start your journey. When it’s time to find your perfect home, come to Alltru to get preapproved for a mortgage. Happy house hunting!
