How to Budget for Buying a Home

Understand your credit history

Your credit score plays a huge role in determining your mortgage rate, which in turn affects your monthly payments. The higher your score, the lower your rate.

Your score is based on the information in your credit report. It's very important to understand your credit report and know your credit score before you work with a lender.

So, if needed, start working on improving your credit score now. Pay your bills on time, keep your credit card balances low, and don't open any new credit accounts in the months leading up to your home purchase.

Understanding debt-to-income ratio

A debt-to-income ratio helps lenders assess your mortgage payment ability. A ratio between 41% and 45% indicates a healthy balance between debt and income. Some lenders prefer lower ratios, improving your loan approval chances. To calculate it, add up your monthly debts (including mortgage, credit card, and car payments) and divide by your gross monthly income.

Calculating your monthly payments

Now, let's get into the details of budgeting for your monthly mortgage payments.

PITIA is an acronym for Principal, Interest, Taxes, Insurance, and Association fees. It represents the total monthly cost of homeownership. Here's what each component entails:

• Principal: The portion of your mortgage payment that goes toward reducing the loan balance.
• Interest: The cost of borrowing money, calculated as a percentage of the loan balance.
• Taxes: Property taxes assessed by local governments.
• Insurance: Homeowner's insurance that protects against property damage and liability.
• Association Fees: Monthly fees for homeowners' associations (HOAs) if the property is within a managed community.

Understanding PITIA helps you gauge the full financial commitment of homeownership and ensures you're prepared for all associated costs.

A good rule of thumb is that your monthly housing costs (including mortgage, property taxes, and insurance) shouldn't exceed 28% of your gross monthly income. Use an online mortgage calculator to play around with different home prices and see what fits your budget.

Money down

Saving for a down payment is crucial. Traditional advice says you need a 20% down payment to buy a home, but that's not always the case.

Many first-time homebuyers put down much less than 20%. In 2023, first-time buyers put down a median of just 8%, according to the National Association of REALTORS®. It is possible to get a mortgage with less than 8% down.

So, how do you save up for that down payment? Here are a few strategies:

• Automate your savings: Set up automatic transfers from your checking to your savings account each payday.
• Cut unnecessary expenses: Take a hard look at your spending. Do you really need all those streaming services? Or maybe it's time to cut back on eating out.
• Consider a side hustle: The gig economy is booming. You might drive for a rideshare service, freelance, or find other ways to earn extra income in your spare time.

Don't forget taxes, insurance, and fees

Remember, your mortgage isn't the only cost of homeownership. Don't forget to budget for:

• Property taxes
• Homeowners insurance
• Maintenance and repairs
• Utilities

Another good rule of thumb is to set aside 1-3% of your home's value each year for maintenance and repairs.

Lastly, don't forget about closing costs. These typically run between 2-5% of your loan amount and include things like appraisal fees, title insurance, and attorney fees. Make sure you factor these into your savings goal.

Budgeting for a home might seem daunting, but with some planning and discipline, you can make it happen. Remember, it's a marathon, not a sprint. Start early, stay consistent, and before you know it, you'll be holding the keys to your very own home.