One of the most important steps when searching for a home is to create an intentional budget that takes into account both the initial costs and the ongoing expenses. Doing this will help you find a home that meets both your lifestyle needs and your financial situation. Here’s how:
1. Assess What You Can Afford: A common way to estimate the price range of a home you can afford is to multiply your gross annual income (what you earn before taxes) by three to five, according to Fidelity. Understand that mortgage rates will also have a significant impact. Lower rates can substantially increase your buying power. Lenders set an interest rate for each person based on various factors, such as credit score. A higher credit score may mean a lower interest rate or better loan terms.
2. Consider the Initial Costs: When budgeting, take into account these one-time initial costs that you will pay after your offer is accepted:
The down payment: This is typically between 5% and 20% of the home’s purchase price. However, qualified borrowers may put down as little as 3% with options like Freddie Mac’s Home Possible or HomeOne mortgages. Both require private mortgage insurance, which is an additional expense to consider.
Earnest money deposit: The earnest money, also known as a good faith deposit, is approximately 1%-2% of the home’s purchase price and is an amount you send with your offer to show the seller that you are serious. At closing, the amount paid in earnest money can be applied to your down payment or closing costs.
Home inspection: The home inspection, which will be your responsibility, typically costs between $300 and $450, according to recent estimates from Rocket Mortgage, and will reveal information about the home and its potential issues. Your agent should be able to recommend several well-qualified inspectors.
Closing costs: Closing costs are what you will pay to the people involved in your purchase, such as your lender and real estate agent. Also known as settlement fees, closing costs typically amount to 2% to 5% of the purchase price, and you may be able to roll them into your loan. Work with your lender to find the approach that best fits your financial situation.
Moving expenses: Whether hiring professional movers or doing it yourself, online resources like the moving cost calculator from Realtor.com can help you estimate potential costs. When hiring movers, get quotes to ensure you are getting a fair price and avoid moving scams.
3. Plan for Ongoing Expenses: Once in the home, you will be responsible for making monthly payments. These may include mortgage principal, interest, property taxes, homeowners insurance, private mortgage insurance, escrow payments, and homeowners association fees. Most lenders agree that you should not spend more than 30% of your gross monthly income on these expenses, although this number depends on your financial situation. You will also need to save for regular maintenance expenses, such as appliance upkeep.
4. Leave Room for Flexibility: Make sure to include savings for repairs or replacements of costly items, such as your roof or HVAC system. This flexibility in your budget can also help you face financial emergencies, such as job loss, illness, and other unexpected circumstances.
5. Use Tools to Guide Your Decision: To help you answer the critical question of how much home you can afford, use Freddie Mac’s housing affordability calculator, available at myhome.freddiemac.com. This free online resource also offers a wealth of essential information to guide you at every step of your homeownership journey.
As you search for your dream home, stay prepared and informed. An essential aspect of this is setting a realistic budget that accounts for the true costs of homeownership.
Source: StatePoint