How to Budget for Your Home Purchase
Whether you’re a first-time buyer, moving on to your next home or searching for an investment property, the first (& most important) step to buying a home is to start a budget.
How Much Can I Spend?
Financial advisors like to say you should be spending between 30% and 33% of your gross monthly income towards your housing payment. That means if you make $6,000/month ($72,000/year) that you should have a monthly housing payment of roughly $2,000/month. Mortgage underwriters will allow for total monthly debt to go up to 45% and in some cases even 50% of your gross income. That’s all irrelevant if you are either uncomfortable with that number or if there are items that don’t show up in their calculation. The big one that doesn’t typically get added in is childcare. That’s where it becomes especially important to put together your own personal budget that’s in line with actual household expenses.
Whenever I first talk to someone about buying a home, my first question is how much are you comfortable with on a monthly basis? I truly believe that’s the best starting point. From there, it’s best to start looking at how much money is coming in and how much money is going out.
Creating a Budget
From a mortgage perspective, we always use gross income rather than net income when qualifying borrowers because it’s the only way to have consistency across all types of borrowers. If I were looking at my own household though, I would start with the net overall family income (income after taxes and retirement are taken out of your paycheck). What’s left after taxes and retirement is the figure I would use as a starting point for overall household income.
Then, I would look at bank statements from the past 90 days to start putting together expenses. The easiest items to pull out would be set monthly expenses including utilities, cell phone, internet/cable, car payments, student loans, credit cards and personal loans. For those with children, childcare would also be a factor. Other “expenses" to consider could also be investments. Do you contribute to a College Fund or 529 plan? Are you contributing monthly towards and IRA? After you get through those, I would then categorize my other monthly expenses like food, entertainment, gas or transportation costs and travel are categories, but there can be others.
There are online tools like Nerd Wallet, Mint & The Balance, but you can also just build a simple excel spreadsheet. Once you’ve lined up monthly expenses, it should start to become pretty clear how much is leftover and going into savings. Now that you have the numbers lined up, where do we see our comfort level? Do you need to make changes to where the expenses are going? Would paying off debt make a larger monthly housing payment more feasible or comfortable? How do we adjust our balance sheet to put more money into savings for a down payment? Putting pen to paper can illustrate where your household income is currently going, but changes to behavior might be necessary to make the next step.
Make a Plan
Now that you have a budget, you can make a plan. It can be very eye opening as to where monthly disposable income is allocated and once you have those figures in a budget, reallocating those can be a lot easier. Some simple changes to monthly routines can net quite a bit of savings over just a few months. It can also help when considering other expenses you incur when buying a home, and in the case of a condo, where there might even be savings. For instance, if the condo includes some utilities, it’s now easy to see how that will affect your monthly budget.
Buying a home can be a daunting task, especially the first time around. Having your financial house in order can take the stress out of the process.
Written by Joe Burke of Guaranteed Rate. Edited by Kourtney Murray.