When the idea of buying a home becomes a possibility, figuring out what you can actually afford or what loan amount you can qualify to borrow can be a little bit tricky. You may have a general idea in terms of what you want your mortgage loan amount to be and what you want your monthly payment to be, but that number can start to get a little bit hazy as you're browsing through online late at night doing your online house shopping. It's pretty easy to start gravitating towards those professionally lit photographs of the huge renovated kitchen or the manicured yards. You might start to think, " What's another 100 grand? Or maybe do you really need an extra bedroom, additional garage space or pool with a swimming bar? Why not? You can see with these examples how a person's initial home budget can quickly balloon out of control. There are a few simple first time home buyer guidelines that can start to help you figure out what your budget would be based on your personal finances. You should take the time to consider these factors because they can help you understand the realities of what your budget will be, as well as any potential cost associated with buying your home. Unless you're planning to buy a home in cash, you're going to need to figure out how much you can qualify to borrow. Basically, this means that you're going to learn what prospective lenders are willing to lend you, and mortgage lenders who are going to use a few simple guidelines to help estimate how large of a mortgage you can actually afford. Lender guidelines are generally not going to be set in stone. However, it might be worth having them in the back of your mind as it can help inform you of your home buying process along the way. It's critical to remember that your lender that you choose will eventually tell you a maximum amount that you're approved to borrow for a home, but you do not have to use every penny of that money. It's really important to keep in mind all the other factors that may include, will your new mortgage payment fit comfortably into your budget while also maintaining your savings? You may have to make some trade-offs along the way; maybe less travel, less shopping, less dining out if your new payment is going to be higher than your current rent or your current mortgage payment. If you have some idea about what your new payment is going to be, it might be a great idea to try living with it for a few months before you actually commit to purchasing the house and the loan. You could put the difference between your current payment and your new payment into a savings account to see if that new payment is within your budget, and as a bonus, you'd be saving some money up along the way. Looking at it, your mortgage might not be the only expense that goes up after you purchase a home. If you're buying a bigger place, you may have to pay more for utilities; especially if you're currently renting, and some of those costs are already covered, included in your rent every single month. Maybe if your home has a lawn or a pool, you might have to maintain them or pay someone else to do it. Or a common example is you might have a homeowners association or HOA fee to consider every single month or quarter. You're also going to have to purchase homeowner's insurance and pay property taxes. You could start getting a pretty good idea of what these costs would be by searching homes online, but you could also do this by hitting up some open houses. Along the way, those open houses might help you set some priorities, such as are you willing to give up a bigger bathroom to get a bigger kitchen? Along the way, you could talk to a Realtor to get information about HOA fees and other types of expenses that you might experience with your new home. One major consideration to look at when you're trying to decide how much of a house you can actually afford would be the down payment and how that impacts your ongoing costs. Typically, home buyers are encouraged to put down as much as they feel they can reasonably afford. The more you put down, the less you're going to borrow, which means that you would have a lower monthly payment and throughout the course of the loan you would pay less interest because you're borrowing less. Traditionally, the down payment for a home was looked at 20 percent. But with the increase in home prices, especially based on different markets, this is not always going to be realistic. In fact, if you look at the first time homebuyers on average put down about 5 percent, according to the National Association of Realtors. However, it's important to keep in mind that if you put down less than 20 percent, you may end up paying what's called PMI, which typically costs between 0.3 and 1.5 percent of your loan on an annual basis. It's important to note that this type of insurance protects the lender, not you, in case you're having trouble repaying your loan. There are going to be some exceptions. There are certain lenders that when you borrow with them, you may be able to avoid PMI by putting down as little as 10 percent. It's really important to understand your options based on the specific lenders that you're considering, along with your personal financial situation. Making a down payment may be wise, but you also need to consider having enough savings left over to cover all of the other costs such as closing costs. One potential cost to factor into the home buying budget would be the amount that you need to have in reserve, sometimes required by loan programs. Although this may not be necessary for conforming primary residences, for secondary, jumbo and income properties, you may need to have liquid assets and by liquid, I mean easily accessible money that will be able to cover at least two months and sometimes more of your total mortgage payment. Making sure that you have enough in your coffers to cover the wants, and the unexpected, along with maintaining your current lifestyle, including savings, is absolutely crucial. Sometimes this may mean waiting a little bit longer so you could save up for a larger down payment. Or sometimes that means setting your sights up on a little bit more affordable home. That way you can enjoy your home without the extra stress that comes with cramping your budget.
