How to Set a Home Buying Budget

Imagine you are just about to walk into a home with your real estate agent. Prior to this moment, you spent months saving for your down payment and all the associated costs that go with buying a home. With the money tucked away into your savings account, you cannot wait to find the home you will finally say is yours.The agent opens the door and you step inside together.Right away you know…this is my dream home.After your tour, you sit down to write an offer. After doing some discussing you realize two things:

1) The cost of the home will be more expensive then you can realistically pay per month

2) You should have talked about this before searching for homes.

It’s incredibly disappointing to walk away from your dream home after you realize it is outside your budget.That is why you want to be prepared with a healthy budget that can become your guideline during your home search. A clear starting point is to figure out what your monthly budget should be.

A conservative starting place is the 28/36 rule. The 28/36 rule says that you must:

MAKE SURE YOUR MORTGAGE PAYMENT IS NO MORE THAN 28% OF YOUR PRE-TAX INCOME

AND

MAKE SURE YOUR TOTAL DEBT PAYMENTS ARE NO MORE THAN 36% OF YOUR PRE-TAX INCOME

This prevents you from budgeting for a home that would cause you stress once you are knee deep in monthly house payments.Remember, the 28/36 rule is a conservative guideline and is not always possible in every situation. If you have no other debt and can keep your other expenses low, you may be able to have a higher debt ratio and still be okay. Either way, you must decide what is comfortable for you. Once you have this number, you can start creating your budget to include the specific categories you need to save for. When creating your budget, remember, this blog is only a guide. What you need to have in your budget is dependent on your individual needs. Local market, loan type, current loan rates, and all other costs will be unique to your home buying process. Use this as an example to help you create the right budget for you.Take a look at the specific categories below to help for you form your budget.

DOWN PAYMENT

In our first blog post in our “Home Buyer Series”, we talked about how much you want to save for the down payment and any associated costs for the home. Typically, for first time home buyers, this comes out to around 3-5% for the down payment and an extra 2% for any other associated costs to complete the home buying process.

PRINCIPAL AND INTEREST

Your monthly house payment is more than just paying your loan. The acronym PITI stands for Principal, Interest, Taxes, and Insurance, and is often used to describe the main components of your monthly payment, but only the principal and interest go towards paying off your loan. The rest of the costs will be explained in the following sections.

PROPERTY TAXES

Your state or the local government will determine the amount of taxes you will pay per year on your property. This number is assessed each year to determine the unique amount owed in property tax.In Oregon, property taxes are included in your monthly loan payments. The lender holds this money until taxes are due and then pays the tax bill on your behalf.Property taxes are determined by the formula: ASSESSED HOME VALUE x PROPERTY TAX RATE = PROPERTY TAX.The assessed home value is determined by your local tax assessor. In Yamhill County, you can find out the specific information for your home by going to the county tax assessor website and logging into your profile. You can also ask your real estate agent about tax information for any property you are interested in.

HOMEOWNERS INSURANCE

While it’s always a smart idea to make sure your home is covered by insurance in case of theft or destruction to your property, your lender will also require you have homeowners insurance. If any any point your policy is cancelled, they have the authority to charge you for choosing a policy of their choice, which is usually very expensive. Many lenders have insurance companies they work with and can help walk you through the process.Cost and types of coverage vary greatly so make sure to do thorough research before choosing a plan!

PRIVATE MORTGAGE INSURANCE

This is different than homeowners’ insurance because it is protection for your lender in the event that you default on your loan.If you pay a downpayment on your home that is less than 20% you will most likely be required to pay private mortgage insurance (PMI) until you have 20% equity in your home. If you have an FHA loan, your private mortgage insurance never goes away unless you pay off the loan or refinance with a new loan down the road.Just like homeowners insurance, PMI can vary by loan, so do adequate research before choosing a loan type.

HOMEOWNERS ASSOCIATION DUES (HOA)

Certain communities require a monthly or annual payment towards the local homeowners association. A homeowners association is a local jurisdiction that provides the rules and regulations for the homeowners within their community.The regulations are meant to help keep up and improve the value of the community.Homeowners Association Dues may go towards maintenance of the community and to associated amenities.Only specific communities have HOA dues which is why it is important that you research the community for a homeowner association prior to placing an offer on a home. Remember that HOA payments are not included in the PITI amount.

HOMEOWNER REPAIRS

A good home warranty (if you decide to get one) will cover big issues that crop up in your home after moving in (within the designated window). However, it is possible other repairs will need to be done on your home that are not covered by a home warranty.Saving up for repairs that could be construed as “general wear and tear” or “neglect” are necessary when unexpected issues come up like leaks or pests. It’s also a good idea to know when you will need to repaint, replace siding, or replace your roof and save up for those expenses as well.

MAKE IT YOURS

Add anything else you want to take into account and have saved before buying a home. This budget will be unique to you and your needs. Refer to this budget often throughout the home search process to make sure you are staying within it.Print this blog out and take it with you as you meet with your real estate agent as a guide.Taking the time now to budget will save you big disappointments and stress in the future, so make sure to make it a priority.Happy Planning!