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Creating the Budget
Your lender will be your number one resource when completing a budget, along with your real estate agent. You will need estimates from them for the following in order to create an accurate budget:
- Interest Rate
- Property Taxes
- Annual Property Insurance
- Mortgage Insurance
- Home Warranty
As a rough rule of thumb, you can budget up to 1/4 your monthly income toward a mortgage payment, though that does not mean you have to or should spend that much.
Tips to Avoid Overspending
Don’t Budget from the Preapproval
Just because you can spend $250,000 doesn’t mean you should. You can ask your lender to pre-approve you for a specific amount instead of a maximum amount. That way you are not tempted into busting your budget.
Stick to Necessities
It might be a bad idea to look at homes outside your budget because your eyes tend to be bigger than your wallet. Create a budget and a plan and stick to it when home shopping.
Budget the Mortgage Payment, Not the Price
Unless you’re paying cash, a house doesn’t cost you $200,000, for example. It costs you $1350/mo. So it is important to work backward and decide what mortgage payment you can afford, and then figure out what price that translates into. That amount fluctuates depending on the interest rate and taxes. The math is something your Realtor and lender can help you with.
Don’t Forget Utilities
Utilities are part of your home cost. The military basic allowance for housing (BAH) is designed to include utilities. Budget at least $150/mo for water and electricity for a small home, $300/mo for a large one.
Don’t Forget Maintenance
Your home will have ongoing maintenance and the occasional repair cost. I recommend budgeting 10% of the monthly mortgage toward maintenance. Example: for a $1150/mo mortgage, budget $115/mo toward maintenance, for an “actual” monthly home cost of $1265/mo.
Keep at least six months of mortgage payments in savings. Lenders generally look for at least three months of “reserves”, but aim for six. If you don’t have that money on hand yet, I recommend holding off on a home purchase until you do. You want to be prepared to weather sudden life changes.
Plan for the Future
If this is not your “forever” home, you might want to forgo some luxuries and save your resources for your future home buying adventures. Skip on anything that isn’t absolutely necessary for your desired quality of life. You’ll be in a sounder financial footing to get those items in your next home.
Have an Exit Strategy
Three years is not a long time in real estate. In three years, you will have paid down effectively $0 on your mortgage. If you are only expecting to be in a home three years, be prepared to either sell at a significant loss or rent it out. And buy a home with its rental and resale potential in mind.
Even if you are buying your “forever” home, three years can be a long time in terms of job opportunities, family size and status, and other variables. Be conscious of your home’s resale potential and rentability.
Don’t Get Envious
It can be tempting to expect a certain standard of living based on what your friends and colleagues in the area own. Don’t let that influence your spending habits. You have to do what is right for you and your financial picture. I recommend being conservative and frugal, to ensure you avoid financial hardships down the road.
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Here’s an example budget based on the recommendations above for a home with a $1150/mo mortgage.
- $1150/mo mortgage
- $80/mo lawncare
- $115/mo maintenance/repairs
- $200/mo utilities
- $60/mo home warranty
$1605/mo total home cost.
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