The prospect of buying a new home is exciting, but the process can also be stressful. One of the best ways to minimize stress while maximizing enjoyment is understanding your housing budget before you start looking for a new place.
By evaluating your finances and identifying a workable number early in the process, you will save yourself a lot of time (and headaches) in the future. Here is a complete guide How to Buy Your Colorado Dream Home.
Ready to get started? Let’s take a look at some of the major factors that go into your housing budget.
Ready to discover what type of home you can afford?
Step 1 – Understanding Your Mortgage
The first step to gauging your budget is finding out how much you can borrow. To estimate what size mortgage you qualify for, we’ll start by assessing things from a lender’s POV.
The 28/36% rule: For financial institutions, everything is a numbers game. Lenders use the 28/36% rule as a guideline to determine your budget. 28 refers to the percentage of your pre-tax household income that can be spent on your housing costs
- Homeowners Insurance
- Property Taxes
The 36 refers to the percentage of your annual household income that should be allocated to debt. This includes your mortgage payments, but it also includes credit card debt, school loans, and so on.
Down Payment: If you’ve saved up a significant down payment, pat yourself on the back. This means that you can knock a large chunk off the total price of your home right off the bat, reducing the amount you need to borrow.
This can make a home at the top of your budget more accessible, or make the mortgage payments on a more affordable home easier to manage. Either way, you come out ahead.
Credit History and Score: Your current debt is the only thing lenders look at. A mortgage is a long-term obligation, so they will also pay attention to your credit history and credit score. This impacts the loan you qualify for, the down payment required, and the interest rate.
In other words, if you improve your credit score before starting the home buying process you can qualify for a better loan with lower interest.
Step 2 – Analyzing Personal Factors
Mortgage lenders might view homeownership exclusively through the lens of dollars and sense, but you’ll typically have some other considerations when setting your budget. Here are a few factors that can impact your home budget.
Location: There are a ton of perks to living in a big city, but this also comes with an increased price tag. On top of that, your housing budget in Denver might be lower than your housing budget in [small local town] due to the cost-of-living increase.
Debt Plans: Lenders view your debt in absolute terms and don’t look at your payment plans. If you take an aggressive approach to debt and like to pay off large chunks at a time, you will probably want to leave yourself some breathing room by lowering your housing budget.
Lifestyle: If you spend your weekends enjoying barbeques in the backyard and family movie night in the rec room, your housing budget and entertainment budget have some serious overlap. If you prefer a life full of ski holidays, Nuggets games, and restaurant dining, it is a good idea to lower your housing budget accordingly.
Setting a home buying budget? Make sure it’s unique to you and your family.
Your long-term plans are a big part of your budgeting, and knowing what the future holds can have a huge impact on the amount you can afford to spend. The good news? By deciding to start the process you’ve already taken the most important step.
Need some help making sense of everything?
Book a free budgeting consultation with Expect Mortgage Co. today.