Preparing a Realistic Home Buying Budget
Today’s real estate market is a double-edged sword for home buyers. On one hand, it is the perfect time to buy a home. Mortgage rates are still hovering just above historic lows, which gives you an opportunity to save significant money on monthly payments. However, the inventory of available homes to buy is also at record lows, which gives sellers a huge advantage over buyers. This means that when you find a home you want to buy, you will most likely be in a bidding war. In this scenario, it is important to act decisively and act quickly. You will need an accurate picture of what you are willing to spend and what you are able to spend. This is key to making decisive decisions. Having an accurate understanding of what you can spend requires having a realistic budget.
What Goes Into a Home Buying Budget?
There are a lot of aspects to a home buying budget. An important thing to consider regarding home buying budgets is that it’s not necessarily a single budget. While some people are able to buy a house using entirely cash, most people need a mortgage. This means that you need to budget for what it takes to get a mortgage. Then, you need to budget for continued mortgage payments. Developing a budget to account for your mortgage payments is the simplest part. Mortgage payments should account for no more than 30% of your monthly budget. To accurately budget for these payments all you need to do is add up your monthly income and your monthly expenses. Then, add in mortgage payments and make sure they are not more than one-third of your overall expenses. The tricky part of making a home buying budget is all the other stuff to consider regarding the home purchase.
Budgeting for a Down Payment
One of the biggest considerations you need to make when buying a home is how much to budget for a down payment. Conventional wisdom is that you need to set aside 20% of a house’s value for a down payment. However, this is a myth.
There are several loan programs that allow you to put less than 20% down for a home loan. One of the methods is getting an FHA loan. FHA loans have backing from the federal government and allow people who have less than perfect to get their home. In turn, this allows you to be flexible with your budget and put a smaller down payment. If you qualify for an FHA loan, reduced down payments that range from 3.5% to 10%. The 10% applies to people with a credit score ranging from 500 and 579. The 3.5% is for credit scores that are at least 580.
Applicants who have military service may qualify for a VA loan. Also federally backed, these loans do not require a down payment at all. They also do not have any credit score requirements. If you qualify, these loans are great for budgeting your new home.
Although all of these loans are government backed, there are also other options that don’t break the bank. Working with a professional mortgage broker like Peoples Choice Mortgage is key to getting access to lots of loan options. We work with several lenders and their own requirements to get the best home for you. Working with hundreds of lenders will give you a better chance of finding a home that is best for your budget.
Budgeting for Closing Costs
It’s important to know about other costs aside from a down payment that go into budgeting. One of these costs is the closing cost. Closing on a home is the last appointment where you officially buy the property. On this day you will sign all of the paperwork, pay your down payment, and pay your closing cost. Closings costs are a separate fee that ranges from 2-5% of the total cost of a home. They can include title insurance, origination fees, underwriting fees, document preparation fees, and other expenses.
In order to effectively budget for these costs, you must read the entirety of the closing agreement. Go through all of the paperwork before you go through with the deal so that you know how much money you need. Luckily, the team at People’s Choice Mortgage is here to walk you through the process. We can help you understand the closing costs and find a home that fits your budget.
Budgeting for Bidding Wars
This is a very competitive home market for home buyers. Chances are that when you find a home you like, there will be others trying to buy that home, as well. As a result, it is very common that the first bid you put in on the home will not be the last. You will probably have to increase your offer to outbid other buyers. Make sure that your budget accounts for being able to offer more than you anticipated. A good way to help workaround this issue is to look at homes that are slightly below your budget. This allows a cushion for you to increase your offer and still remain within your budget.
However, the housing market can be unpredictable. You may find yourself in a situation where you need to offer a bid higher than the appraisal value of the home. They will not give you a mortgage that exceeds the appraisal value of the home. In these scenarios, home buyers have to pay the difference between the appraisal value and the home offer in cash. You should prepare for that possibility now and add that into your budget. Consider this your war chest that you need to use in order to win a bidding war. This is cash on top of your down payment and on top of any closing costs.
Final Thoughts
There is a lot that goes into buying a home and mortgage contracts can be confusing. The best way to navigate this process and make sure you have a realistic budget is to work with a true professional. The independent mortgage brokers at People’s Choice Mortgage are here to help you with every step of the process. We know that buying a home can be overwhelming, especially in this market. Our job is to simplify this process and make sure you are aware of everything that is happening. We never want our clients to be surprised by closing costs or other items that should be included in any budget.
That is why we provide a complimentary, no-obligation mortgage qualifier to all of our clients. This allows us to get an accurate picture of your financial situation so that we can help you make your budget. We want to help you buy your dream house, but we want to make sure it’s affordable and within your budget. If you are interested in buying a home and want help crafting a budget that is perfect for your situation, contact us! There are a lot of mortgage products available on the market. Our goal is to make sure we find the specific one for your needs.
