How to Determine Your Budget for a New Home
When you're ready to buy a home and find a place to new long-term, the budget that you can afford is one of the most important parts of the process. You'll need to calculate the amount of house that you can purchase to ensure that you can continue to make your mortgage payments on time. Here are a few important steps to take to determine your overall budget when you're ready to relocate.
Calculate Your Household Income
Calculate all of your household income, which can include bonuses that you receive and your gross monthly income. Multiply your household income by two or three to get an idea of what your price range is before you begin to search the real estate market for your next home. You can also factor in alimony that you receive and money from investments or dividends.
Factor in Your Debt
Your debt will influence how much you can afford when you purchase a home because you'll need to repay the outstanding balances on student debt, auto loans, and credit cards. Lenders will calculate your debt-to-income ratio, which is the percentage of your monthly income that is paid towards your debt. Debt also includes existing mortgage payments on other properties that you own and child support payments.
Evaluate Your Credit Score
Your credit score will influence how much lenders will trust you when you apply for a home loan. The credit score is a reflection of how well you've repaid your debt in past years and if you've had any late payments. You can improve your credit score by paying off balances, paying more than the minimum amount each month, and avoid using your credit card for everyday purchases. Contact a credit bureau to have any errors removed if you notice there are mistakes on the report.
Lenders typically approve loans for applicants who have a credit score of at least 740. Borrowers with higher credit scores can lock in lower interest rates with their loans, which can save thousands of dollars over the years and increase the amount of home that you can afford. Check out the current mortgage rates and look around for the lowest rate through a local bank or financial institution.
Save for a Down Payment
The more money that you save for a down payment on your next home, the less your mortgage payment will be each month. You can also reduce your interest rate with a larger down payment. Although 20 percent down is ideal when applying for a mortgage, lenders are more flexible with the amount of your down payment depending on the type of loan that you apply for when purchasing a home.
Many lenders also want to see that you have additional money saved in the bank, which can prevent you from getting behind on your monthly payments in the future if you suffer from a job loss.
Consider Extra Expenses
Buying a home will come with extra expenses that can add up each month and should be factored into your budget when determining what you can afford. You may have a larger budget but a long list of expenses that can cause you to become financially strained. You may discover that you need to pay for homeowners' association fees when researching the local area information, which cover the cost of upkeep in the neighborhood. The cost of utilities may also be higher than you're used to paying for depending on the size of the property. Additional costs include landscaping, repairs, homeowner's insurance, property taxes, and upgrades that you may need. You'll also need to factor in the cost of new furniture that you may need for certain rooms of the home.