We all want a home, but the process of getting there doesn’t feel very fun. It’s an emotional roller coaster that can wear you out before you even get in the game. But if you want to score an offer on a house, the first thing to do is figure out your budget.
Every area of your life needs a budget. When you leave home to set up your own home, your budget is the building block that keeps everything in control. Your budget establishes how much money you can spend on housing each month and at what point in your financial life you want to buy a house (which is really good advice for setting up all other aspects of your life as well).
So how do you set up a budget for buying a house?
It’s not exactly the same process. As far as I know there’s no official list of rules for getting it right – just lots of different approaches and models with which to work.
In a series of articles Movers-edge shows you the 10 Concrete Tactics that, in my opinion, are the most useful for scoring an offer on a house. Some of them are directions in your budgeting life, while others are options to consider when you’re trying to buy a house and keep the process fun.
All I can say is don’t do what I did. Buy a house without knowing the market and without making any plans for how you’re going to make it work (except for saving up enough money – which was doable).
Limits and boundaries
Your budget anchors your life. It sets the limits and boundaries for how you act in your home, with your family, in your community, and, most important, in the hunt to buy a house. So let’s get started!
1.) Save up a down payment. Ideally, you want 20 percent of the value of the home as cash sitting in the bank before you start looking for a mortgage loan. This is a really important part of buying a house because it gives you three major benefits:
You look more financially stable and reliable to lenders than people who can’t scrape together ten grand (this is what they call good “equity”).
You look financially stable and reliable to people who you’re working with on your mortgage loan, because they can get more confidence if they know that you’ve got the big sum of money sitting on deposit.
Rigorous mortgage process
You’re going through a rigorous mortgage process that’s very difficult to handle without a large enough down payment. So even if you make a few mistakes up front, the amount of money you’ve saved up gives you an additional safety net. You qualify for more mortgages and pay less interest as well. For example, I’m writing this article with a bit over $30,000 cash in my savings, which is far short of the 20 percent needed for my mortgage loan but good enough for my needs.
2.) Start preparing your budget for the process of buying a house. If you know how much money you need to live on and don’t use that information to guide your home buying decisions, you’ll be in for some major trouble. Start by counting all of your monthly housing expenses and writing them down on a piece of paper (the easier the better, just start with a few dollars and work up from there).
List of expenses
I’m going to take that list of expenses and break it down into two categories: fixed expenses and flexible expenses. Fixed expenses are things like mortgage payments, insurance, maintenance fees, property taxes, utilities, homeowners’ association fees and so on.
Flexible expenses are all the other things related to your budget. These are things that you can’t swing without. Things like groceries, clothing, recreation, hobbies and so on. Next, make a list of the income or spending that you have available each month. This includes things like salary and overtime pay, alimony payments, child support payments. Things that are extra in each month are also included.
So what we’re doing here is setting up a basic two-column calculator. Fixed expenses on one side and flexible expenses on the other.
Now you’ve got a solid understanding of the process that you’re about to go through.
Houses that meet your needs
3.) Decide on which house you want. Now that you know how much money you need, start to look at houses that meet your needs. But first things first: what is it exactly that you need in a house?
You can break down your needs into three main categories: location, size and quality. The more important things like location and size are obvious. But the second section (“quality”) can be more difficult to define. It’s something that comes from experience. Some people are very particular about their homes, while others just want something affordable and livable with enough space for their growing family.
Cost of a house
4.) Get the cost of a house. Before you go out looking, it’s important to find out what houses and neighborhoods in your area are really going for. The #1 place to start is your local nonprofit Real Estate Industrial Association (REIA), which keeps track of neighborhood sales prices and resale values. You can also call up a real estate agent. But be sure to ask for their take on what house might suit your needs. Otherwise you’ll get too much information about the most expensive houses on the market.
You’ll also need a moving calculator to get an approximate estimate of the size and cost of moving your things. You can use this:
This is a free online home moving tool that lets you calculate how much it will cost you to move your belongings. It includes everything from deck of cards to full vans.
5.) Make a rough estimate of the budget that you’re going to need in order to buy a house. To do this, take your fixed housing expenses. Subtract your flexible housing expenses. Write it down on a piece of paper (or your computer). This is how much money you need in order to buy a house and have money left over for the rest of your life.
6.) Get an idea of what’s available in terms of houses. Don’t just walk into a bank or mortgage lender’s office with only a few hundred dollars to buy a house. You’ll most likely be told to go away. Instead, call up a real estate agent and ask them if they can show you around the neighborhoods you’re interested in. Always make sure that your agent is authorized by the state to sell real estate.
Choose your neighborhood
7.) Choose your neighborhood, area and price range. Hopefully, you’ve already been looking around for houses using the Internet. If not, use it now to find some good houses that might suit your tastes and needs. Once you’ve found the neighborhood, area and price range that you like, write your findings down on a sheet of paper.
8.) Figure out the best way to pay for it all. Once you’ve decided on the house that you want, it’s time to figure out how you’re going to get there.
You can go with three ways:
Borrowing money from a friend or family member
Using a home equity line of credit (HELOC)
Or taking out a mortgage loan.
If you’re borrowing money from a friend, be sure that what you’re asking for doesn’t put your relationship with them in jeopardy. If it does, then you’ll have to talk about the matter (the last thing you want is an angry alimony check every month!)
However, if all things are okay with your friend, then when they come clean with how much they can lend you. Just go over their offer and figure out what’s best for you. Keep in mind that a mortgage loan means more money on the line every month. You’ll pay for the house down payment and interest during the first few years.
If you’re using a HELOC, then it’s important to know where you stand with your credit. The last thing you want is for your credit rating to drop because you got into a house loan; while this is very unlikely (and could even backfire on you), it’s still something to be aware of.
9.) Figure out how much house payment will cost. So now that you’ve found the house that fits your needs and budget, it’s time for the next step: figuring out the monthly monitoring and payment of the mortgage. This is going to take some serious effort because it is far different than what most people are used to doing.
Worth it or not
10.) Figure out if it’s worth it or not. Is the house that you want a good deal? There’s no easy way to know this. Even real estate agents can give bad advice (it’s called “flipping” houses in the business). It’s up to you, the house buyer, to find the house that makes sense for your family. Take your time and don’t rush into anything (you’ll thank yourself later).