It’s no secret that buying a home is expensive – but the reason is not merely property’s high price. Rather, the process of applying for a home loan, inspecting and appraising the property, obtaining necessary protections and acquiring the deed is stressful, time-consuming and costly, so you better be prepared with a strong and practical budget.
Many home-buying budgeting tools available online only go so far as to help you calculate how much home you can afford. However, when you are planning to invest in new property, you likely need some help tidying up your personal finances and better understanding all the expenses coming your way. That’s why you need this better budgeting checklist – so you can be better prepared for the costly road ahead.
Understand Your Debt-to-Income Ratio
Before you take any steps toward owning real estate, you should understand how much money you have and where it is all going. This is a critical step for a few reasons: First, because buying property is a significant change to your personal finances, it is a good idea to get to know your funds and expenses so you can make more informed decisions when you begin your home-buying journey. Secondly, you should be aware that your lender is going to delve deep into your personal finances; it is best that you avoid any surprises in their findings.
Perhaps the most important financial figure for you to understand is your debt-to-income ratio, which tells you and lenders how much more debt you can acquire before you exceed your earnings. Ideally, you won’t have any debt – but that’s unlikely. The average young American has about $30,000 in student loan debt as well as a credit card balance around $6,000. You should calculate your monthly debt by looking at your mandatory minimum payments and comparing that against your monthly income.
If you can’t reduce your debt to zero before you buy a house, you should strive to make your debt-to-income ratio as favorable as possible. Most lenders prefer a 50/30/20 budget, where 50 percent of your income goes to needs, 30 percent to wants and 20 percent to debt. Your debt payments should never exceed about 30 percent of your income, so you might need to devote time to paying down your debt before you house hunt.
Plan for Big and Costly Projects
Most modern first-time homebuyers purchase properties with remodeling projects in mind. In fact, millennials typically spend more than $26,000 on renovations to get their property feeling like home. If you expect to customize your investment with a few big projects, you should calculate your expected expenses and add them to the cost of your home. You might also strive to find a mortgage that will also pay for renovations if you don’t expect to save enough to pay for the updates you crave.
Research Your Insurance Needs
Once your home search starts in earnest, you should begin looking into insurance and other protection policies worth your investment. Your lender will not approve your mortgage loan and you will not be able to close without a standard homeowner’s insurance policy, so you can begin comparing provider rates now. You might start with your auto insurance provider; most insurance companies offer discounts when you bundle multiple types of insurance together.
In addition, you might look into acquiring a home warranty, especially if you expect to purchase an older home. Home warranties protect different aspects of your home from different types of damage as compared to home insurance; with a home warranty, you can ensure that appliances and various systems, like electrical, plumbing and HVAC, will stay in working order regardless of their age. Home warranty companies pay for maintenance and replacement, if necessary. Depending on the state of the housing market, your home’s seller may offer a home warranty with the purchase of the property – but they may not, so it is best to have a policy researched and prepared.
Practice Making Higher Monthly Payments
Unless you are way over-paying in rent – or avoiding rent payments altogether by living with your family – your raw monthly mortgage payment will likely be equivalent to the amount you are paying now. However, your mortgage won’t be your only monthly property-related expense. In addition to your mortgage, you will be paying for property tax, home insurance and various utilities every month. This could mean thousands more in expenses every year, and if you aren’t accustomed to this, you might not have enough in checking to make the correct payments on time.
Thus, you should practice making higher monthly payments. Using an advanced mortgage calculator – one that factors in insurance and taxes – you should estimate your expenses when you own a home. Then, when you pay rent every month, you should subtract your rent from your estimations and write a second check to put into an untouchable savings account. Later, you can use this account to help pay for your home; until then, this exercise will help you budget better for your monthly expenditures.