Budgeting and Financing Your Dream Home

In the current economic landscape, the prospect of owning a home can feel like a faraway dream. However, skyrocketing rental prices have convinced many adults that it’s worth the effort to lock in a mortgage that makes the most of their finances.

The trick, of course, is creating a sound budget and finding a financing option that makes buying a home possible. Before you start perusing properties, here are a few preliminary budget and finance tips to consider.

Creating Your Budget

You don’t need a complicated spreadsheet to create a budget; you just need to spend a little time reviewing your accounts and finances. 

A basic budget should include all of your income and expenses. Once you have this, you can tweak your budget to make room for what you plan to spend on a new house. This may include saving for a down payment as well as making adjustments in anticipation of ongoing expenses like a mortgage, home insurance, property tax, and annual maintenance.

What Kind of Down Payment Can You Afford?

Depending on the type of loan, your required down payment may range from as little as 0% to 20% of the property purchase price. 

The first step is to find out what types of loans you may qualify for. The Department of Veterans Affairs (VA) has favorable lending terms for military members and spouses, while several states offer incentives for first-time homebuyers, such as grants for down payments, closing cost assistance, or low interest rates.

For traditional mortgages, lenders usually require the homebuyer to pay for mortgage insurance if they make a down payment of less than 20%.

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Calculate Reasonable Monthly Payments

Determining how much house you can afford may be as simple as following the 28/36 rule, which says that no more than 28% of your gross income should go toward housing costs and that monthly debt payments, including your mortgage, shouldn’t make up more than 36% of your total budget.

Luckily, there are online mortgage affordability calculators to help you figure out numbers that will work with your income and debts. Alternatively, you can pay down those debts or save up for a larger down payment in order to expand your housing budget.

Prepare for Your Investment

Once you have a clear idea of your budget moving forward, it’s time to consider the best way to finance your purchase. This includes creating a plan to reach your budgeting goals in a set time frame, exploring home prices in the neighborhoods you’re interested in, and researching your loan options.

Work in a Contingency Fund

Saving for a down payment and planning for monthly mortgage payments can put a sizable dent in your savings and budget. The thought of adding a contingency fund can be unappealing.

However, it’s important to work in a small overage of at least 10% to cover unanticipated costs. You may have to offer a bit more if your dream property ends up in a bidding war. If you’re buying a custom home, you might want to make changes during building that increase your overall price tag. You’ll be glad for your contingency fund if that happens.

Pay Down Debts and Bolster Your Credit Score

Getting your finances under control starts with examining your current credit score and addressing any debt you’re carrying. Top-tier credit scores not only help you gain loan approval but also provide access to the best lending terms (i.e., lower interest rates).

What can you do if your credit score is less than ideal? Start by checking reports from the big three credit reporting agencies (Experian, Equifax, and TransUnion) to make sure there are no inaccurate black marks, such as credit fraud or debts you’ve already paid off. If there are, address them immediately to clean up your report and boost your score.

Next, pay off any debts you can, such as car loans and revolving debt like credit card balances. You can also request higher credit limits to improve your debt-to-income ratio, but make sure to keep the balance low.

Automate Savings in Preparation for Your Purchase

Once you’ve paid off some debt, you can start putting extra money into savings for your down payment. The best way to do this is by automating withdrawals to coincide with direct deposits from your employer.

When the money is out of sight in a savings account, you may be less tempted to spend it. You should also look into higher interest earners like short-term CDs to help your money grow faster.

Get Preapproval for a Mortgage Loan

When you’ve got your credit score and savings where you want them, it’s time to start looking at properties. First, however, you should get preapproved for a mortgage loan so that when you make an offer, you have something to back it up. 

Keep in mind that some developers work with preferred lenders, so if you have a certain neighborhood or developer in mind, it pays to explore the benefits this lender offers.

Your Journey to Homeownership

Owning a home is a big part of achieving the American dream. For anyone facing sky-high rental prices in the current housing market, a mortgage can be an attractive and affordable alternative.

To become a homeowner, you have to meet certain criteria concerning your credit score, down payment, and monthly mortgage payments. With a sound budget and financing in place, you can take a few self-guided tours and find your first (or forever) home.

John Henry Homes offers award-winning home designs with opportunities for customization. Contact us now to learn more about available properties.