When you're ready to buy a home, Step 1 has to be knowing what you can afford to buy! In many cases, if you have income and good credit you'll find a lender that will pre-approve you for a mortgage pretty quickly. I wouldn't blame you if you assumed that was a good way to set a budget - when my wife and I bought our first home that's exactly what we did, after all.
I know better, now, and I teach new buyers I work with the age old saying "You live in your monthly payment." Just because you COULD make a large down payment and you COULD spend 50% of your paycheck on your mortgage payment doesn't mean you want to (or SHOULD). So, instead, start with a comfortable monthly payment you want to make and work backwards to discover what your budget really is. Below is an example of what that could look like, and you can adjust the numbers for your own situation.
Let's say you want your monthly payment to come out to $2000 per month (remember: that payment includes your mortgage payment, your property taxes, your homeowners insurance, and your HoA dues,if applicable), and let's say you have $20,000 for your down payment. You can find a mortgage calculator here or just Google one (make sure it lets you factor in all the necessary parts of your payment).
Enter a purchase price into the calculator - maybe the price of a home you'd love to buy, maybe start with what you guess you can afford. Start where ever. For this example, we'll start at $300,000. Fill in your down payment and estimate the other parts of your monthly payment. You can either use the numbers from a property you've looked at online, or you can use some ballpark figures like I have below.
You can see, for our scenario, your monthly payment is still a little higher than you wanted it. From there, you can lower the purchase price ($275,000 would make the numbers work out), increase the down payment ($40,000 would get the numbers pretty close), decide you're comfortable spending a little more per month, or look at properties that have lower taxes or lower assessments.
This exercise is really less about finding a hard-and-fast budget cap, and more about giving you a much clearer picture of what you can truly afford.
That's it! You're on your way to buying a new home! Did you find you can afford more than you expected? Was it less? Whichever way the numbers worked out, keep reading on. I actually have tips a little later on about how you might be able to get free money for your downpayment and some other considerations that can put a home a little more within reach!
Please let me know if you have questions about this, or anything else related to home buying.
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