No matter what your income is, you should always make a budget before you start looking for a home. Homeownership might seem like an impossible dream if you are already on a tight budget, but it is possible if you plan ahead and make good choices in the homebuying process. Given that a home is the largest purchase that most people make, it is crucial to consider a number of different factors when determining what you can afford.
Many people with a tight budget don’t consider the prospect of owning a home because it seems entirely out of the question. However, a home is also an investment that can pay off in the future. No matter what, homeownership is something that should be considered carefully regardless of income.
Make a Home-Buying Budget
The first step you must take as a first-time homebuyer is to budget how much you can afford for a monthly mortgage payment. When making a home-buying budget, make sure you consider not just the expenses you currently have, but the cost of things that you anticipate happening while you own your home. Be sure to include the following in your budget:
- How much you want to put into savings each month.
- Estimated mortgage costs, which you can find by browsing home listings.
- The cost of all your bills, including utilities, insurance and others.
- What you spend on food, clothing, transportation, entertainment and gifts.
- Expenses that may come up in the future, such as the cost of childcare, for example, if you plan on starting a family after you buy a home.
Your income will ideally equal the amount of money that you spend each month on the things listed above. If there’s a shortfall, you will have to make adjustments to your expenses to avoid going over budget in order to buy a home.
Understand How Much Buying a House Really Costs
As you’re searching through home listings, it’s important to look at more than just the list price for a home. After all, you are on the hook for more than just the mortgage once you close the deal. Additional costs you need to consider include:
- How much your down payment will be and the cost of private mortgage insurance (PMI), which is usually required if your down payment is less than 20 percent of your loan amount.
- Closing costs, which include a variety of one-time fees for things such as appraisals, property line surveys, document preparation, underwriting and wire transfers.
- Ongoing expenses such as property taxes, homeowner’s insurance, homeowners association (HOA) fees and regular utilities, which are oftentimes significantly higher in a home than in an apartment or multi-family home.
Some home listing websites will estimate the monthly mortgage in addition to taxes, PMI and HOA fees. In many cases, though, you will have to calculate these for yourself. Luckily, there are online tools that can help you figure out the actual cost of owning a home based on the price, ZIP code and other details.
Search for Realistic Homes
Many prospective homeowners make the mistake of searching for houses that are simply out of their budget. While you may be able to get approved for a loan that exceeds the amount you budget for a mortgage, this decision will catch up with you in the future. Not only is it stressful to live with a mortgage that you struggle to pay, there is also a very real possibility of facing foreclosure if you fall behind or are unable to maintain payments on a mortgage that’s out of your budget.
To avoid this pitfall, it is important that the scope of your search only includes homes you can actually afford. You can find a great home that fits your budget as long as you are realistic about what truly counts as a must-have and what should be considered a nice-to-have.
Check the Real Estate Market
Some sellers will price their home too far above the market value for the area, and unless you’re vigilant, you might miss this fact. Whether a homeowner is sentimental about the house or is overstating its features, it is all too common to find homes that are overpriced. To make sure you’re getting a fair price on a home, check online for the selling price of similar homes in the neighborhood. If you find that a house is indeed overpriced, you can use this fact to your advantage when negotiating a selling price.
As you’re checking, you may also find that a home is priced well below market value. In some cases, this may be a red flag that something is amiss. Be sure to carefully read the listing for any potential issues that may be the cause of an underpriced home. Home inspections, which are important before any purchase, can also reveal the reason for a home’s price.