Determining your budget — as well as what price range you should be shopping in — is one of the first (and most critical) steps to buying a home.
But doing so isn’t always cut and dry. You’ll need a good handle on your household finances, some knowledge of local property tax rates and HOAs, and some information from your mortgage lender.
Need help determining your homebuying budget? Want to zero in on the best price range to shop in? Let’s walk through how to do it.
Step 1: Know Your Finances
The first step is to sit down with your spouse or co-buyer (if you have one) and take a good, hard look at your finances. How much income are you bringing in each month? Financial experts recommend spending no more than 30 percent of your monthly income on housing costs, so use a calculator, and work out what that threshold would be for your family.
Here’s an example: If you make $5,000 per month ($5,000 x 0.3), then you’ll want a mortgage payment no higher than $1,500.
Once you’ve determined this number, you’ll also need to look at your savings. How much can you afford to spend on a down payment? Keep in mind, you’ll also need to cover closing costs, which generally come out to about 3 to 5 percent of the home price.
Step 2: Do Your Research
You might not have a dream home picked out just yet but pull a couple of listings that catch your eye — ideally, ones that are comparable to what you’d consider buying. How much do they cost? What are their annual property taxes and HOAs dues? You’ll need this info to narrow in on the price range.
You should also talk to your preferred insurer (or even get a quote) for homeowner’s insurance. This will also play a role in your total monthly payments, so having a good grasp on your costs can be highly beneficial.
Step 3: Get Preapproved for Your Loan
The next step is to get preapproved for a mortgage loan. With preapproval, the lender will run a credit check, assess your finances, and determine the maximum loan amount you can qualify for. They’ll also nail down the most appropriate loan program for your needs, as well as the interest rate you’ll pay on your mortgage. These are additional details you’ll need when honing your budget.
Step 4: Plug in the Data
Finally, head over to our affordability calculator and start plugging in all the data you’ve gathered. Once you’re done, you’ll see the maximum price point you can afford as a homebuyer.
A quick word of caution here: You don’t have to max that amount out. In fact, you probably shouldn’t. As a homeowner, you can usually expect some surprise expenses here and there. Leaving a little wiggle room in your budget can allow you to more comfortably handle these, as well as any other sudden costs that may arise.
We’re Here to Help
If you’re ready to start shopping for a home, getting preapproved is crucial. Reach out a loan officer at Premier Nationwide Lending today to start the process.
Premier Nationwide Lending is an Equal Housing Opportunity lender. Sponsored by NTFN, Inc. 700 State Highway 121 Bypass, Suite 100, Lewisville, TX 75067 NTFN NMLS 75333.