One of the most important steps to take while house hunting is to create an intentional budget that accounts for both upfront costs and recurring expenses. Here’s how:
1. Assess What You Can Afford: A common way to estimate the price range of a home you can afford is to multiply your annual gross income (what you earn before taxes) by three to five, according to Fidelity. Lower mortgage rates can substantially increase your purchasing power. Lenders set an interest rate for each person based on several factors, such as credit score. A higher credit score could mean a lower interest rate or better loan term.
2. Account for Upfront Costs: When budgeting, account for these one-time upfront costs:
The down payment: This is typically between 5% and 20% of the home’s purchase price. However, qualified borrowers can put down as little as 3% with options such as Freddie Mac’s Home Possible or HomeOne mortgages. Both require private mortgage insurance, which is an additional expense to consider.
Earnest money deposit: Earnest money amounts to approximately 1%-2% of the purchase price of the home and is a sum you submit with your offer to show the seller you’re serious. The amount you pay in earnest money can be applied toward your down payment or closing costs.
Home inspection: The home inspection typically costs between $300 and $450, according to recent estimates from Rocket Mortgage, and will tell you about the home and its potential issues.
Closing costs: Closing costs are what you will pay to the people representing your purchase, such as your lender and real estate agent. Closing costs typically amount to 2% to 5% of the purchase price, and you may be able to roll them into your loan. Work with your lender to find the approach that best fits your financial situation.
Moving expenses: Whether you hire professional movers or DIY your move, online resources can help you estimate potential costs. When hiring movers, get quotes to ensure you are getting a fair price and to avoid moving fraud.
3. Plan for Ongoing Expenses: Once you’re in the home, you’ll be responsible for making monthly payments. These may include your mortgage principal, interest, property taxes, homeowners insurance, private mortgage insurance, escrow payments and homeowners association fees. Most lenders agree that you should spend no more than 30% of your gross monthly income on these expenses. You’ll also need to save for regular maintenance expenses.
4. Leave Room for Flexibility: Be sure to factor in savings for repairs or replacements of big-ticket items, such as your roof or HVAC system.
5. Use Tools to Guide Your Decision: To help you answer the critical question of how much home you can afford, use Freddie Mac’s home affordability calculator found at myhome.freddiemac.com.
As you hunt for the home of your dreams, stay prepared and informed. One essential aspect of doing so is to set a realistic budget that accounts for the true costs of homeownership.
Source: StatePoint (Edited by She’s Got Influence)
