When budgeting for a house, there are two things you that are important. That you take the right steps, and that you avoid making mistakes.
First, some notes about taking the right steps when it comes to budgeting for a home.
How to Budget for a Home
Start Well in Advance. If you want to start budgeting for a home, you must start well in advance of when you want to buy the home. That’s because you’re going to have to come up with a downpayment when you purchase the home. And when the loan underwriters review your application, they’ll want to make sure that you show a history of being able to save money on your own. The loan underwriters don’t allow you to borrow or take money from your parents or other family members in order to buy a home, so prepare in advance by saving money each month to help finance your home’s down payment.
Don’t Just Work on Your Savings, Also Work on Your Credit. The second thing you’ll need to show the bank before they lend you money for a home is that you are creditworthy. If you’re budgeting to buy a home, then you probably don’t have any prior mortgage balances on your credit report. That probably means that your credit score isn’t as high as someone that has had more types of debt on their account. Being at this slight disadvantage, you should do everything in your power to make sure that your credit is ready for inspection by the bank. As soon as you can, get a free copy of your credit report from each of the three credit bureaus and check them for any inaccuracies or any negative marks. Work on cleaning up any negatives, and at the same time use your existing credit accounts to help you get a higher score. Do a little research about how to boost your credit score and see what you can do to help raise your credit score. For example, if you have credit cards but don’t use them, it may be wise to use them for a few months, and show that you can payoff the balances. After all, good credit score can knock off as much a 1% on your mortgage loan rate, saving you thousands of dollars over the life of the loan.
Create a Hypothetical Budget for Your New Home. The only way you’ll know whether or not you can really afford a new home is to create a hypothetical budget and make sure that you can afford the house you want to buy. Don’t let the bank tell you how much money you can afford to spend on a house. And make sure you leave yourself with enough room each month to have a comfortable lifestyle and still save ten percent of your earnings each month. To make a hypothetical home budget, start by listing all of your current income and expenses in a spreadsheet column. Then, in the next column over, list all of those same expenses assuming you purchase a new home. You’ll have to account for higher mortgage, insurance, taxes, utilities, lawncare, home maintenance and all of the expenses that go along with owning a home. Also, when you move from an apartment to a home, you’ll spend the next few years buying things to fill the house, and buying things that you’ll need to maintain that house. Make sure you account for all of these items in your hypothetical home budget.
When you’re comfortable that you’ve prepared to buy a home, then the next step is to learn how to not make mistakes while budgeting for the home.
Mistakes to Avoid When Budgeting For a Home
Part of getting ready to buy a home is to understand how not to make mistakes. We found some tips from Investopedia that offer some good advice about mistakes to avoid:
Lacking Knowledge of “How Much” House They Can Afford Everyone wants to own their “dream home” or castle. A first home, however, seldom has all the features of a young buyer’s dreams. Before shopping for a first home, understand the price ranges for houses that you can afford. Also, spend more time researching financing options and how debt ratios have a greater effect on mortgage approvals than evaluating home styles, square footage or design preferences. Learn how much house you can afford, and then evaluate the home-for-sale options.Assuming Foreclosed and Short-Sale Properties Are Always Fabulous Deals Everyone wants a deal. Unfortunately, the real estate industry is like a massive flea market. All properties are worth only what others are willing to pay for them. Certainly, many foreclosed properties and short sales may be wonderful bargains. However, professional real estate investors know there are no “free lunches.” Many of these properties have serious structural, HVAC, plumbing or other problems. Do not assume anything.Selecting the Wrong Buyer’s Real Estate Agent Seller’s agents have a legal responsibility to negotiate the “best deal” (as in highest price) for home sellers. Buyer’s agents have the same fiduciary responsibility to represent only the buyer’s interests, trying to get the “best deal” for them. If you have no trusted referrals for superior agents, search the National Association of Exclusive Buyer Agents to find experienced local representation. Picking the wrong buyer’s agent to protect your interests could cost you thousands, if not hundreds of thousands of dollars, in the long-term.Underestimating the Real Cost of Home Ownership This common mistake is probably the most annoying, aggravating and budget-busting error of all. If you’ve been renting for some time, you may be accustomed to calling your landlord when things go wrong. Buying your first home eliminates this option. The onus and cost is on you, the homeowner. Even if you opt to buy a brand-new home, things will go wrong. Don’t bother staring at the phone. Solving the problem is up to you. There is usually a cost to fix these problems. Few people are master electricians, plumbers or construction professionals all-in-one. Plan to contribute to a fund for emergencies and repairs. You’ll need it.Not Including a Contingency Clause in a Sales Agreement Many standard Purchase and Sales Agreements now contain contingency clause language, but some do not. Sellers would prefer this language didn’t exist, buyers cannot do without it. Particularly important is mortgage contingency language and dates. Should you not receive the mortgage you need, the purchase is impossible (unless you have a bank account balance that rivals those of the wealthiest Americans). However, without this clause giving you a way out, sellers have the right to retain your deposit, and any other funds you may have expended for things like appraisals, home inspections and land surveys, are gone forever. Be sure there is a mortgage contingency clause in your Sales Agreement with reasonable dates before you sign on the bottom line.
Read more about 5 Common Budgeting Mistakes When Buying A Home.
While these lists aren’t exhaustive, they are a good start on how to prepare for buying a home. The key point is that you prepare as far in advance as possible, and that you don’t make any mistakes along the way. Getting your credit and bank accounts ready is a big step, as the banks will look at these two items like they were your resume and you were interviewing for a job at their bank.
Besides being prepared, it’s important that you don’t get carried away and try to buy more house than you can afford. At all costs, you must leave some wiggle room so that you can live comfortably and still afford to put away ten percent of your salary each month for retirement and other savings.