The very first step of the home buying process is to determine your budget. The absolute worst thing you can do is fall in love with a house you can’t afford. Not only is it incredibly disappointing but that house will also set unrealistic expectations for the rest of the homes you see and make it feel like you are taking a significant "down-grade" into homes within your budget. There are a lot of unofficial estimate calculators out there that can give you a general idea of your budget. If you're not familiar at all with the mortgage process, I would also recommend doing your research before you proceed. To get a better understanding of loan options and common terminology and to get access to a mortgage calculator, Click Here.
Most lenders will use some form of debt to income ratio (a comparison of your debt you have to how much money you make). You can also get a loan pre-qualification.or pre-approval that will tell you what a lender is willing to approve you for a mortgage (remember there are still no guarantees at this point). A pre-approval letter can strengthen an offer on a home if you choose to submit one. But remember, just because a lender approves you up to a specific amount doesn’t mean you should max out your budget. We were actually able to qualify for a home that would have cost over $150,000 more than what we were comfortable with. While it is exciting to see a big number on the pre-qualification or pre-approval letter there are also certain considerations you should make when determining your true budget. Buying a home is much more than the purchase price and monthly payment. There are many other expenses to consider to ensure you make a decision you'll be happy with for years to come.
Ideal Lifestyle – Keep in mind your home is a cost. Going to the top end of your budget will pull from money you could spend doing other things like traveling, going out to eat, shopping, decorating, doing renovations, giving, etc. While a nice big house is wonderful, but it's also no fun to be “house poor” and feel like you cannot do anything else because your margin for the “fun” or discretionary expenses is gone. Being willing to give up your daily coffee habit is one thing but consider what sacrifices might have a lasting impact on your quality of life.
Maintenance and Utilities – The cost of a home isn’t just the monthly mortgage payment. Try to estimate or consider how much a home is going to cost to maintain. Regular maintenance and monthly costs including water, electricity, gas, and insurance are all additional expenses. Some costs might be situation dependent. If there is a big yard, would you want to hire a lawn service company? You should be able to get a good estimate of monthly costs through area averages. Just remember that the cost of a house isn’t just in the house payment but also in all of the monthly expenses required to keep the house in working order. Deferring maintenance can lead to major issues in the future so these are definitely not things you want to put off for the sake of saving a few bucks.
Emergency Fund – Life happens. Having a few months of savings in an emergency fund is crucial to giving yourself some security and peace of mind. It may be tempting to dump that emergency fund into your down payment to get a bigger house but please consider holding back a few months expenses. While a home warranty might be able to protect you from unexpected home-related expenses in the short term, it doesn’t protect you against other unexpected expenses like medical bills, car issues or job changes. Things like that are stressful enough without having to be worried about how you are going to pay your mortgage on top of it all.
Moving and Initial Home Expenses – Moving is not cheap, whether you are moving across town or across country. Even a DIY move will generally cost you a couple thousand dollars (this will vary of course depending on how much stuff you have!). Make sure you budget these costs into your immediate house expenses. Also factor in any set-up or installation fees for utilities and any purchases you would like to make for your new home (furniture, window treatments, décor etc) as those add up quickly!
Future Plans and Expenses – Consider any new expenses you are expecting within the next few years and how that might impact your finances. Any future large purchases should be factored in to monthly expenses (i.e. new car). When we purchased our first home we were planning on having a baby soon after so that is a consideration we made with our budget (because, lets face it, kids are expensive!). It’s true that typically income will go up with time as well but it may or may not be enough to cover a change in expenses so it is definitely worth considering.
The truth of the matter is that you figure out what is best for your individual (or family) financial situation. Don't let a piece of paper from a lender skew your budget. While it is enticing to get the biggest house you possibly can, long term it can be more stressful than it's worth and put you in a bad financial situation. In the end, you have to do what is right for you!
