How to Build a Strong Homebuying Budget
Before committing to buying an Alexandria home, it is important to know the type of household someone can afford. Otherwise, homeowners could end up house poor, spending the bulk of their monthly income on simply paying for their home.
By creating a strong homebuying budget ahead of time, people can determine what they can afford - and rest assured their income can cover it. A homebuying budget can also help leave room for future changes in the family, such as having children or going back to school. Here's how to get started.
Take an Inventory of All Monthly Income
Before anyone can decide what they can afford to spend each month, they must add up all their income sources for everyone who contributes to the household. Income sources may include:
- Freelance earnings
- Long-term disability benefits
- Rental property income
- Interest from investments
Across all sources of income, add up the post-tax dollars coming into the household. That figure is the total amount available to spend and save each month.
Jot Down Household Expenses in Detail
Household expenses often eat up a good portion of the income coming into the house each month. If they grow high enough, they can even leave little for the intended mortgage payment. Prospective homebuyers need to add up all these expenses to see where they are at and make necessary changes.
To do this, they should look at all the things people in the household pay for on a regular basis, such as:
- Car repairs
With this information, it will be clear how much is left for the mortgage payment. If it is not enough, then expenses will need to be trimmed before moving forward.
Determine How Much Homeownership Will Cost
Homeownership does not just entail paying the mortgage payment on time each month, though this is a big part of it. Owning a home also comes with many other expenses as well, including:
- Homeowners insurance
- Property taxes
- Maintenance and repairs
- Renovation projects
- HOA dues
Ideally, the cost of the house payment, insurance, and other expenses should not exceed 25 percent of the monthly household income. So, when figuring out how much of a mortgage people can afford, they must compare it to their income to get into the right range. Otherwise, they could end up with minimal cash flow that is not tied to a monthly expense.
Consider Future Aspirations and Their Costs
Although figuring out income, existing expenses, and homeownership costs helps dial in how much one can afford, prospective homebuyers also need to consider their future aspirations. If they want to add to their family, go to college, or pick up an involved hobby, they must have the income leftover to allow these aspirations. This can be difficult to predict, but with a little research, it is possible to get an idea of what their future aspirations might cost.
Add It All Up to See What They Can Afford
After identifying all income and expenses, prospective homebuyers can start to see how much they can afford. They can use their ideal mortgage payment and other homeownership costs in their calculations to see what their budget will look like after buying a home.
If expenses outweigh income, changes will need to be made to avoid ending up in the red. They can elect to buy a less expensive home to lower the mortgage payment or eliminate some of their other expenses. Either way, they need to match income to expenses, giving every dollar a job to do, maximizing their ability to stay on steady financial footing after buying a house.
By following these steps, prospective homebuyers can create a strict homebuying budget and make their money work for them. This way, they can buy a home with confidence their income will support all their endeavors now and in the future.