You’ve got your startup off the ground and you’re feeling pretty good about things. As a matter of fact, your business is doing so well that you’re ready to embark on the grand adventure that is owning your first home, right?
Not without a budget, you aren’t. It will be all too easy to get swept up in the excitement of renovated kitchens, picturesque yards, and master suites with hot tubs once you start touring potential properties. That’s why you need to sit down and set some financial limits for yourself ahead of time. You don’t want to jeopardize your fledgling business—or your peace of mind—by getting in over your head.
Here are a few tips on how to budget for your first home. The process may seem daunting at first, but when you’re looking back on it from the comfort of your new abode, you’ll be glad you took the time to crunch the numbers.
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It’s very important that you steer the ship when it comes to creating and sticking to a budget. You can’t trust a bank to do it for you—both because they have their own motivations and because they don’t know the reality of your finances.
Some people with lots of disposable income on paper actually have hefty student loans, a brand-new car to pay for, retirement savings goals to meet, financial dependents and unpaid medical bills. Likewise, people with a modest income may live a debt-free lifestyle and be ready to take on a higher mortgage. As Investopedia points out, the last thing you want to do is borrow more than you can afford to pay back on the bank’s recommendation alone. It’s time you get comfortable with a spreadsheet and your financial statements.
When you’re figuring out what you can afford, don’t just factor in the price of the home. You’ll also need to factor in the interest you’ll have to pay on the loan, as well as property taxes and insurance. Part of creating a comprehensive budget is researching these figures. For example, a homeowners insurance quote comparison will help you assess monthly premiums, while researching average property taxes in the areas you’re interested in will help you get an idea of these annual fees.
You will need a down payment of at least 20 percent of the total cost of your first home. Maybe you’ve been squirreling away money for years in anticipation. Or perhaps you plan on reallocating your living expenses to beef up your savings. Either way, you need to have at least this much ready to go for a one-time payment.
Frugal Rules writes, “The key to a proper home buying budget is to have not only the down payment, but also cash reserves on top of that.” Remember: Buying a home is always more expensive than you think it’s going to be. You don’t want to get halfway through the process and realize that you’ve drained all your resources dry. A situation like that could force you to rack up more debt or abandon ship.
There’s no such thing as saving too much. Your budget can help you figure out areas in which you can save ahead of time. With dedication and effort you can meet and even surpass your goal of having 20 percent down.
When it comes to budgeting for your first home, you can use some common ratios to guide you. Money Under 30 lists their three rules of home affordability, which may vary a bit by lender but will give you a solid starting point:
When you’re making your budget, consider the big picture: down payment, interest, property taxes, homeowners insurance premiums and other debts. That way, when you get the keys to your first house, you’ll know you have a solid financial foundation.