Budgeting for Your Purchase
It is important to figure out a budget before commencing your house search. Unlike renting, purchasing a home comes with a number of additional monthly and annual costs.
• The first budget consideration is the amount of the downpayment that you can afford. Most lenders require a downpayment of 20% of the sales price. However, there are many loan programs available that may require a lesser amount. For instance, there are some programs that require as little as 3% downpayment.
• Once you determine the loan program that is best for you and the downpayment required for that program, you can begin to create your monthly budget to determine the appropriate price range for your home.
• You should try to restrict your monthly home buying expenses to 30-35% of your gross salary or monthly paycheck. The expenses should include your monthly mortgage payment (principal and interest), property taxes, insurance, maintenance (lawn, snow, painting, etc…) and some small reserve for future larger expenses such as replacing the roof or repainting the exterior of the home. If you are considering a condo or home in an association then your budget should include the association dues as well.
• Your budget should be conservative. If you are pursuing an adjustable rate mortgage (ARM) then you should make sure that you can still afford the home when the interest rate rises in the future.
• One of the mistakes many homebuyers made during the real estate boom of the last decade was to assume that their home would appreciate in value so quickly that budget restraints were not too important. Unfortunately that sort of thinking led to many of the mortgage problems faced by homebuyers today. The lesson is to remain within your budget so even if your home does not appreciate in value you can continue to afford the home.