If you're venturing into the world of homebuying, one of the first steps you'll take is determining how much of a mortgage your budget can manage. Among your income, your expenses and your debts, there are several factors that go into plotting out your homebuying budget.
Here are just a few of the ways to get started.
Factor Your Pay
Whether you're buying solo or have multiple paychecks coming into your household, the first step is determining your gross income—the amount that you make annually or monthly before taxes are taken out. A general number that's often used to determine affordability is the 30 percent rule—the monthly amount you spend on your mortgage (including home loan payment, insurance and property taxes) probably shouldn't surpass 30 percent of your household's gross income. Starting with this basic factor will help give you a general idea of what types of homes you should start shopping for.
Anticipate New Bills
If you've determined what you can afford for a monthly house payment, you're well on your way to a balanced monthly budget. But one other factor that is easy for first-time homebuyers to forget about is new bills. While a rental property may include utilities as part of the lease agreement, these utilities will be billed to you separately in an owned property. From gas to electric to cable/internet, these are items you should factor into your budget separately. The same goes for services you may not have needed before, such as trash pickup, lawn-mowing and snow-removal services and occasional home maintenance (i.e., furnace inspection, water softener servicing, etc.). Make sure you have these new expenses included in your budget-planning.
Save for a Downpayment
There are some upfront costs associated with purchasing a home—the biggest one is typically the downpayment. Many mortgage lenders will require a particular percentage of the purchase amount to be paid prior to closing. It's a good idea to save some spare funds during your house-planning process so that you have some money set aside to cover these closing costs. South Dakota Housing Development Authority (SDHDA) actually offers a solution for homebuyers without the ability to fully cover a downpayment—click here to learn more about the Downpayment Assistance option.
Try a Calculator
While it's not a one-size-fits-all solution to determining a homebuying budget, a mortgage calculator can at least give you a more concrete picture of what your homebuying scenario will look like. You can see what home loans with various term lengths, interest rates and home prices might look like for your monthly budget, as well as the estimated tax and insurance costs of owning a home. SDHDA has a payment calculator for just that purpose—give it a try.
Take Stock of Your Debt
When you're entering the mortgage preapproval process, one term you might hear often is "debt-to-income ratio." It's essentially the amount of money you have in debt (i.e., credit cards, student loans, personal loans, car loans, etc.) compared to the amount of money your household is taking in on a regular basis. Lenders will use this amount to determine your credit-worthiness, and it will affect the amount of money you're preapproved to borrow. If you anticipate buying a home in the near future, consider being extra diligent about paying down some of your highest-interest debts.