Stewart Blog Article

How to Set a Budget for Your Home

Published on: January 06, 2022


BY ADMIN

There are many factors to consider when looking for your dream home. Size, color, style, specifications, location are all important elements that play into your hunt for the perfect home. However, price is the most important factor you should consider when looking for your dream home. Not sure what your budget should be? Let’s walk through how to determine what you can reasonably afford.

From existing savings, expected monthly income, to regular expenditures and debts, there are many things to account for when planning your new home budget. Let’s focus on two priorities: how much to put towards a down payment, and what you can afford in terms of a monthly mortgage.

Planning Your Down Payment

A down payment is typically calculated as a percentage of your new home’s purchase price, and upon closing, represents your immediate equity in the property. As an example, the typical down payment in 2021 was 13%, according to the National Association of REALTORS®

You will need to determine how much you can reasonably afford, especially considering mortgage loans typically require some form of down payment and require PMI or Private Mortgage Insurance if you cannot pay a minimum of 20% down. So, it’s important to consider all additional fees and their implications to your final home’s cost.

Additionally, larger down payments typically correlate to lower interest rates as your loan would pose less risk to the mortgage lender. While it may be tempting to invest in a home prematurely with a lower down payment, these are some key considerations to make as this is an investment you will be paying off for the next 15-30 years.

Planning your mortgage

Next is selecting your mortgage loan type. There are a variety of loan types, such as a Fixed Rate Mortgage (FRM), Adjustable Rate Mortgage (ARM), FHA loan, VA loan, or conventional loan; in addition to different loan durations, such as a 15 or 30 year loan. You can read more about these here to help select the best option for you.

Then, you will need to determine your loan budget. It’s essential to set a budget before looking at homes so you avoid investing in a property you cannot afford. Using a mortgage calculator can help determine what the monthly principal and interest would be. (Hint, remember that property taxes and insurance aren’t included in this calculation.) Additionally, an amortization calculator can help you review interest rates and solidify the cost your loan will accrue throughout its lifetime. This will help you weigh the pros and cons of your loan type and duration.

However, no matter which loan type you select, lenders use the following two qualifying guidelines to decide how much of a loan you can manage and what mortgage rate you will get:

  • Your monthly housing expenses: mortgage payment, property taxes, insurance, etc. These expenses should total no more than 28% of your monthly gross income.
  • Your monthly living expenses and any long-term debts: utilities, car and school loans, child support, health and car insurance, credit card debt, etc. These expenses should be no more than 36% of your monthly gross income.

Knowing your credit status and how credit agencies rate your credit also may be a deciding factor, especially when you begin talking to lenders. There are three main credit-reporting agencies that will send you the most current credit report on file.

Final Thoughts

Homeownership is a major step. The biggest investment you can make in your home is considering what you can afford and what steps you can take to ensure a good mortgage rate from your lender.

Now that we’ve provided some food for thought in terms of your budget, here’s some links to help you with other steps of the home buying process: