If you would like to afford a property easily and reduce your chances of getting into foreclosure, you will need to set a budget for the property. This will give you an idea of whether you can afford it or not. If you can’t afford it, you may need to wait for a little longer before going ahead with the buying decision. Here are nine tips on making a budget for your first home.
1. Determine what you can afford
If you are searching for a home, you need to begin by understanding how much you can afford and are ready to spend on a property. This will depend on your current income and expenditures. Before you buy a home, you will want to be sure it is the right thing to do. In order for the decision to buy a home to pay off, you will need to live in it for a period of at least five years. The actual number of years is not fixed in stone, but you need to play with different scenarios to decide whether to buy or rent. While owning a house comes with the peace of mind, if you will be spending more than 25% of your income on mortgage repayment, it means you might struggle financially. This brings up to our next point.
2. Use the 25% rule
One of the easiest ways of calculating the amount you can afford is the 25% rule, which suggests that a mortgage and all your other debts like personal loan borrowed with help of just right loans etc. Should not combine to be more than 25% of your monthly income. According to the Federal Housing Authority, though, most consumers will be able to afford 29% of their income in paying off their mortgage and other debts each month.
3. Be realistic
Visit sites that sell homes online to see what you can get at your budget. Ensure that you have a list of the features that you must have. Narrow down the neighborhoods you prefer. Be realistic when doing this. You need to set your expectations right and understand what you need. Remember that there isn’t a perfect home. At times, you will need to compromise on things.
4. Determine your deposit
The bigger your deposit is, the more the options you will have when finding a property. In most cases, a deposit of 10 to 15% is required. If you have a deposit of 20%, it will be considered ideal. However, there is a government plan for the first-time buyers and mortgages that will accept a deposit of 5%. If you find a mortgage with a deposit of five percent, you may be charged higher interest rates, though.
5. Consider costs associated with homeownership
Before you start looking for a mortgage, create a budget including the house payment. On top of the monthly repayment, budget for your home insurance, housing repairs, taxes, electricity, water, garbage, etc. You should learn how to live on your new budget for a few months before you buy a home. You can put the money you will be spending on house repayment in a savings account. This is why you need to have additional income after mortgage repayment.
6. Choosing the right home
It could be that you are not happy with the kind of home you can afford. You, therefore, should wait and save until you can put a higher down payment on the house. What you need to do is to put off the purchasing decision for a number of years. However, this will help you to be financially stable and avoid buying something you can’t afford.
You might also purchase a starter home where you can live for five years. With time you may see the value of your home rise. You can also choose to purchase a home that you can then renovate; this tactic would get you a good house for less.
7. Choose a property you are able to handle
If you are a first-time buyer, everything involved in purchasing a home may seem overwhelming Before you consider a home to be affordable, see if its size and condition are suitable. Large isn’t necessarily good, particularly when heating and cooling budgets get out of hand.
8. Consider the additional costs
On top of the down payment, you should set aside an amount for closing. You can ask your realtor the estimated amount of closing cost.
Figure out the type of mortgage that’s best for you. A good idea would be to choose a fixed-rate mortgage instead of an adjustable-rate.
It is also recommended to get pre-approved for the mortgage before you start searching for a home.
If you are still not sure, you should consider if you would like to buy or rent.
It’s also important to understand the moving costs.
It is also advisable to have an emergency fund in case you find it difficult to make the payment as a result of a job loss or other problems.
9. Check your credit
If you get a mortgage, you need to have a credit score more than average. Before you make the buying decision, you will need to go through your credit report checking if there are any errors. You can improve your credit ratings by a number of points if you can pay all your balances due on credit cards and try to make use of credit card two months before you apply for the mortgage. Remember that it can take you up to six months before you can improve your credit score.
Avoid applying for any credit using a new credit card until after closing on the home. Your mortgage lender is likely to consider both you and your spouse’s credit scores in your application. This doesn’t mean you cannot get a mortgage if one of you has a poor credit score, though.
Most Americans still have the dream of owning their own perfect home. If you are a first-time buyer, you will need to choose an affordable home by considering more than just the monthly repayment. Without doing upfront calculations, you may find yourself disappointed. Using the nine tips above will help you buy your new home.