With mortgage rates still low, and a number of flexible loan programs available, it has never been easier to buy your first home. You have some money saved, and being pre-qualified by a lender, you feel you are ready to find that dream home. But you need to set time aside to review your household budget to see the real financial impact of home ownership before you shop. By doing this you will have a much easier transition to home ownership and at the same time get a handle on the amount it costs you to live each month.
When you are pre-qualified for a mortgage loan by a lender there are key debt to income factors that are taken into account. First your gross qualifying income is calculated. This is your paycheck before anything is taken out for federal tax, state tax, and SSI. You may have additional deductions for group health or retirement contribution. What you have left over is what is generally termed as take home pay. This is the amount that needs to be looked at closely to get a realistic consideration as to how much you are willing to pay each month for a house payment.
The second factor that the lender takes into consideration is your monthly debt. But the debt that is counted is mostly restricted to what the new mortgage payment will be which includes property taxes and homeowners insurance, installment loans, revolving charge cards and child support or alimony that currently appear on the credit bureau. This gives the lender a debt to income ratio in which to determine if the buyer qualifies for a particular loan program. There are other aspects that will decide whether the loan is ultimately granted. What we are looking at here is the debt to income consideration only.
So this leaves it up to you to take the extra step in really figuring what it will mean to you to own a home with the take home pay you have. What you are looking at is not only the increase from rent payment to mortgage payment, but also the increase in such things as utilities, cable and garbage service. These may be included in your rent and completely overlooked.
You can make your own personal list and break it down as follows:
House payment- it is the full amount of principle, interest, taxes, homeowners insurance & if any mortgage insurance. If you were given the choice of paying your own taxes & insurance instead of the lender collecting the payment then plan to put 1/12 of the amounts away each month to meet the billings when they are due.
Utilities- Gas, electric, water, garbage and cable. Several of these can have wide swings month-to-month depending on seasonal usage. The utility companies have plans where you can pay a level monthly payment thereby having control of these particular expenses.
Household expenses- Food, household items, clothes are ongoing outlays. Look at your checks and receipts for the last 12 months and come up with an average monthly amount spent for each of these items.
Charge cards, car loans, other installment loans, medical & dental bills- make sure that if you are only paying the minimum it is only for the purpose of budgeting for a home otherwise eliminate as much as possible.
Car expense- Average the gas & repairs on the vehicles for the last 12 months. Car insurance is another expense that can be prorated over 12 months rather than a large lump sum each year.
Other expenses- these are the ones you may totally eliminate, but do you really want to? These are the fun things to do like eating out, movies, recreation, hobbies and vacations that round out your life. You want to feel good about owning your home and not feel trapped in it watching television as your only source of entertainment.
It is very likely that as a first time homebuyer that your housing expense will go up noticeably from what you were used to with renting. Dont let it overwhelm you. By taking the time to see where your money goes you get a realistic perspective on what you can afford. If homeownership appears out of range then perhaps cutting back some expenses, or if possible totally eliminating some, will get you into that first home. |
