Top 7 Budgeting Tips for Buying a Home in the Tuscaloosa and Birmingham Area
Buying a home for the first time can be exciting and it might also be the most expensive purchase you’ll ever make!When buying a home, budgeting is very important to ensure that you can handle the costs and take care of the home for as long as you stay.
A good budget plan begins one or two years before the buyer makes an offer. Here are tips for anyone who plan to become a homeowner in the near future:
Create a Budget Plan
In order to save for a home, create a simple budget plan and set a savings goal.
Here is a simple list:
1. Add up your annual income by combining every source of income you receive each month.
2. List your household expenses- write down every place your dollars go each month.
3. Calculate Home Ownership Costs- If you can’t pay cash for your home, keep your mortgage payment no more than 25% of your monthly take-home pay.
4. Give Your Budget Room to Grow- look ahead and consider events that might increase your living expenses down the road.
For more detailed instructions, read more here.
You also have the option to set up an automatic transfer of funds into savings through your employer or your bank. This is a great way to put aside extra funds instead of spending them.
While trying to increase your savings, you should also do what you can to reduce your debt.
Paying off debt tops saving in terms of priorities because of the interest payments on debt; your debt can exceed the amount of interest you can earn on your savings.
Lenders will want to see that you are managing your debt and keeping your credit card balances low to be more confident in you as a buyer.
Keep an Eye on DTI
Debt-to-income ratios are an important element in a loan approval. This ratio compares minimum monthly payments on all debt to gross monthly income.
If your DTI ratio is over 50%, you should be paying off your debt before thinking about buying a home. Some companies will relax their standards for borrowers with a strong credit score or substantial cash reserves, but in general, FHA will only go up to 43 percent and conventional lenders will only go to 41 percent for the overall debt-to-income ratio.
Save For a Down Payment
PMI (mortgage insurance) costs money every month and it doesn’t go away until you have 20% equity in your home. Its purpose is to protect the lender in case you go into default.
If you can’t come up with 20% down when buying a home, you might want to re-consider buying it. Remember that 20% is the lowest amount you can put down in order to get rid of PMI. Your down payment should be a part of your budget.
Get Pre-Qualified for a Mortgage
Pre-qualified buyers know more about their financial picture and have a better chance of actually getting the loan approved. Getting pre-qualified when buying a home is important because it gives you some insight into how much you can get approved for.
Establish a Firm Price Limit and a List of “Must Haves”
When you’re pre-approved for a mortgage, your bank determines how much they think you can afford to spend on a house; however, don’t assume the number they provide is the amount you should spend. Just because the bank thinks you can afford to spend $300,000,this number likely does not take into account your overarching personal budget or financial obligations.
If you’d like, you can also go online and use a mortgage calculator. This can provide you with a good estimate of how much you can afford to pay based on sales price. Research whether there are other expenses you’ll need to work into your budget after buying a home, such as monthly home owner’s association dues or lawn or pest service. These costs can really add up into your monthly budget and if you’re not willing to sacrifice your current lifestyle, you’d should be wise to choose a less expensive home with a lower monthly mortgage. At DSEAYCOM you can scope out homes within your desired price range, then start prioritizing your list of wants based on your budget. If you decide in advance which amenities are needs and wants, you’ll be in a better position to stay within budget when buying a home.
Keep Tabs on Your Real Estate Agent
When working with a real estate agent, it’s important that you communicate your budget clearly, emphasizing the need to stay within that budget. Good agents will respect your finances and only show you homes you can afford.
Staying within budget when buying a home takes discipline and you must approach the buying process with care. Know what you’re willing to spend and refuse to look at homes listed above your budget. If you’re unable to find a suitable property, re-visit your budget to see if you have any wiggle room. If not, hold out—it’s only a matter of time before the right house comes along.
If buying a home is your goal, then it needs to be your priority. With a little sacrifice and sticking to your budget you can save for that perfect home.
Are you considering buying a home? See how easily you can choose a lender in buying your next home.
At DSEAYCOM, we’re happy to answer any questions you have about buying and selling in the Alabama area. Call us now or feel free to share our contact information with someone you know that needs expert help buying or selling their home.
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