While it would be great to shop for a home with an unlimited budget, the reality is that most families have limited funds for their home purchase. The goal is to optimize your budget – setting the conditions to buy the perfect home for your needs, without spending too much on the property.
For most people, buying a home is the biggest purchase they will make in their lifetime. This investment not only gives you a place to live, but it affects your commute, career, family culture, access to conveniences, and children’s educational opportunities. As you are weighing your options, it’s smart to find the “sweet spot” of affordability. This home buying budget is the place that optimizes the type of house that you can buy, while also preserving your cash for other life responsibilities.
Here are a few essential tips for choosing your home budget:
Don’t start looking at online listings before you know how much you can afford. It’s smart to talk to a mortgage broker first so you know your constraints for buying a home. Pre-approval gives you details about how much you will be able to afford, making it easier to dial in the listings that match your needs.
Plus, a mortgage pre-approval can be a great bargaining card when you submit an offer on one of the properties that you find. This letter from your mortgage broker shows that you will be able to come up with the financing needed to pay for the property. Since the real estate market is so competitive right now, sellers are more likely to choose an offer from a buyer who can show that they can pay for the home.
What You Can Buy vs. What You Can Afford
Just because you are approved for a certain dollar amount doesn’t mean that you should spend that much money on the home. You need to look at more than what the lender is willing to offer you. Also consider other factors, such as expenses that will need to be covered for utilities, insurance, home renovations, and more.
In most cases, it’s best to take a conservative approach when setting your home buying budget. Aim to come in lower than your approved budget, giving you a little bit of wiggle room for unexpected costs. Not only does this protect your spending, but it’s also an important step for minimizing the financial impact if your income changes in the future. It’s essential that you can always afford the monthly payment – otherwise you might find yourself facing a potential foreclosure.
The 25% Rule
One simple strategy to figure out your budget is by calculating 25% of your gross monthly income. Some lenders use larger percentages for this calculation – for example, the Federal Housing Administration recommends that consumers shouldn’t spend more than 31% of their gross monthly income on a mortgage. But 25% is a pretty good number, depending on your individual circumstances.
When a lender is looking at the percentage of your income, they will also consider other debts that you owe. If you have a high debt-to-income ratio, then it will limit the approval amount you can get on the loan. Make sure you are proactive about paying down debts as quickly as possible, which frees up your debt-to-income ratio for a bigger mortgage. As a general rule of thumb, the highest debt-to-income ratio allowed from a qualified lender is 43% in total.
Build a Home Buying Team
If you don’t know a lot about the mortgage or real estate industries, then it can be invaluable to have a team of experts to offer advice along the way. Talk to your real estate agent about current market prices, your accountant about cash flow, and a mortgage lender about approvals. This information will give you a clear idea about the amount you can spend when buying a home.
Blondin Real Estate can help you with all of you real estate needs.
Contact us, we are standing by to assist you!