4 Budgeting Hacks for a New Home
Everyone knows the golden rule of home-buying: Don’t buy more house than you can afford.
It’s easy to get caught up in the fuss of skyrocketing home prices and interest rates, but before you start worrying about that, you need to know exactly what you can afford.
We’re here to help you get the answers and information you need to set your family up for success in the long run.
Keep reading to learn about the 4 budgeting hacks for a new home!
1. Draft a General Budget
The first key point is mapping out your general budget.
This means identifying ALL expenses and ALL income.
Including, but not limited to:
- Groceries
- Health Insurance
- Car Insurance
- Subscriptions
- Dining-out
- Shopping
- Pets
- Phone Bill
- etc.
If you don’t have an exact number for a category, set a ballpark amount based on the last three months of spending.
This information helps you build your income-to-expense ratio.
An income-to-expense ratio, simply put, is the ratio of monthly mortgage (or rent), insurance payments, tax, and miscellaneous spending, divided by your pre-tax income.
Mortgage lenders often use this ratio to determine a potential buyer’s reliability and/or financial risk.
You can learn more about income-to-expense ratios here!
You may notice patterns or non-necessities that can be eliminated to better balance your budget.
2. Figuring Gross Income
Knowing your gross income is the next step in determining what size mortgage payment you can afford.
Mortgage lenders look at your debt-to-income ratio to determine whether they’ll lend to you.
Mortgage lenders have various requirements you must meet to qualify for a mortgage.
Research lenders to become familiar with their financial requirements so you can identify which one will better suit your needs.
3. Determine Your Down Payment
Now that you know what size mortgage you can afford, the next piece of the puzzle is the size of the down payment you can afford.
Home buyers who can pay at least a 20% down payment of the purchase price eliminate the requirement for Private Mortgage Insurance.
Private Mortgage Insurance or PMI is an incurred fee if less than a 20% down payment is paid.
PMI is additional protection for the lender if by chance you stop making mortgage payments.
The PMI amount is a percentage of the total loan amount, added to your monthly mortgage payment.
If you’re planning to put at least 20% down, this is based on 20% of the full purchase price.
For example, a purchase price of $200,000 with a 20% down payment would have a loan amount of $160,000.
But don’t fret if you don’t have a 20% down payment.
There are many loan programs to choose from that offer smaller down payment options.
FHA, VA, and USDA loans are all potential choices along with conventional loans.
4. The Bottom Line
Setting your budget is a big deal and putting all the pieces together correctly makes the biggest difference in your financial future.
The underwriter (employed by the lending institution who makes the decision on approvals) is going to determine if you have shown with confidence the ability to repay the loan.
Therefore, credit application, credit score, property details, and down payment are all part of the decision.
