Planning to buy a home can be both a very exciting and a stressful time. In order to make your initial savings goal for your house’s downpayment, you need to first determine how much you plan to spend on the house. This is absolutely not the maximum amount that the bank says you qualify for in a mortgage. It’s easy to let emotions take over once the excitement of buying a house gets into your mind. You need to make sure that you know your goal and that what is important to you stays at the top of your mind throughout the house buying process. It’s also imperative to know how much house you really need and can really afford to achieve your Big Picture Budget goal and to make sure that you don’t end up over your head financially, unhappy, and house poor.
Know your why
First, like with any goal, make sure that you know your why. Why do you want to buy a house? Why do you think that now is the right time for you to buy? If the answer is because you feel like you should, I urge you to reconsider. You should not do things because you feel external pressure. Buying a house because you think you should or because someone you know just bought one is not a good reason. You should buy a house if you want to and are financially prepared. Are you trying to buy now out of fear? You’re afraid that interest rates will go up or houses will be unaffordable in the future? If so, pause on buying. Interest rates may go up, house prices may go up, but there is no way to tell the future and rushing into something out of fear isn’t the best choice.
Pros and Cons of homeownership
There are definite pros of owning a home. The home is yours. You can paint the walls, fence the yard, and plant flowers, but you also have to deal with the cons. When the pipes burst or the roof leaks, it’s your problem. While some people think that renting is throwing your money away, I think there are times when renting makes financial sense. If you’re not sure where you’ll be located in the next few years or you want the flexibility to pick up and move any time you feel the urge, buying may not be the best choice, at least not right now. Renting also saves you time on fixing things when they break, lawn and yard maintenance, and often comes with other perks like community resources (a pool or gym perhaps). Make sure that whatever option you select, buying or renting, it matches your needs at this time in your life.
How much should you spend on a home?
What home should you buy? Start by looking at your monthly budget. How much can you afford to pay towards the mortgage? Remember that there will still be utility costs like water, electricity, and gas. Also, make sure that you factor in any homeowners association (HOA) fees. Then visit a bank or mortgage lender and see how much how you will qualify to borrow. Remember, in order to avoid Private Mortgage Insurance (PMI) fees, you should put 20% down on the house. Figure out how much your monthly payments would be if you borrow the amount the bank says you qualify for. If the amount you have monthly to spend on a house is less than that amount, make sure you buy a home less than the amount the bank approved you for.
What size home do you truly need?
How long are you planning to stay in the house? For example, if you plan to stay in the house for 5 years and you are currently single and living alone, you probably don’t need a 5 bedroom house unless you plan to get 4 roommates. Pick the house that is right for you and your current needs. If you plan to live in the house for 20 years, it might make sense to buy it a little larger than you currently need so you can grow into it. Just remember, the larger the house, the more area to clean, the more expensive to maintain, the more furniture you need to buy, and the more house to heat and cool.
Dream of your new home
Once you’ve done all of this initial fact finding, start dreaming. Visit a few home purchasing websites to see if there are homes in your price range in the area where you want to live. Be sure not to compromise on the location. You don’t want to narrow your search too much, but location is incredibly important. It impacts your lifestyle, is your neighborhood walkable, near public transit, surrounded by neighbors your same age, within a reasonable commute to work. While there are some compromises that you will need to make during the home buying process, you want to make sure that you don’t compromise in too many important areas and end up spending the next several years in a home that isn’t right for you.
Save for your home
After the dreaming stage (or ideally you’ve already started), save save save. Save as much money as you can. You want your target to be at least 20% of the home purchase price for your down payment. You also will probably want a little bit of money for small home improvement projects like painting or replacing door or cabinet handles. You might even want some money set aside for new or new-to-you furniture and decorations.
Make the home yours
Once you have your money saved, it’s time to find a realtor and start looking at homes. Make sure that as you begin the process you keep your home needs in mind and your budget. It is easy to think that a little more expensive of a home is doable, but you do not want to be house poor. It’s much better to have a home you can enjoy and have some money for things that go wrong or for some fun. Try to be patient in this phase. Not every house buying process goes smoothly and it can be easy to get discouraged. Just remember, eventually you will find a great house that you can call yours and if you follow these steps you’ll be in a good spot financially so you can enjoy it.