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. Doing so will help you find a home that meets both your lifestyle needs and financial situation. Here’s how:
1. Assess What You Can Afford: A common way to generally 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. Understand that mortgage rates will have a big impact too. Lower 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 you’ll pay after your offer is accepted:
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, also known as a good faith deposit, 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. During closing, the amount you pay in earnest money can be applied toward your down payment or closing costs.
Home inspection: The home inspection, which will be your responsibility, typically costs between $300 and $450, according to recent estimates from Rocket Mortgage, and will tell you about the home and its potential issues. Your realtor should be able to recommend several well-qualified inspectors.
Closing costs: Closing costs are what you will pay to the people representing your purchase, such as your lender and real estate agent. Also known as settlement fees, 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 such as Realtor.com’s moving cost calculator 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, though this number will depend on your financial situation. You’ll also need to save for regular maintenance expenses, such as appliance upkeep.
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. Such flexibility in your budget can also help you weather financial emergencies, such as job loss, illness and other unexpected circumstances.
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. This free online resource also offers a wealth of essential information to guide you at every stage of your home journey.
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.
(StatePoint)
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