Buying a home in 2022 is difficult because there is a shortage of properties and a highly competitive market. Prices have soared, and home buyers are finding it even more difficult to budget for their first property. As mortgage rates climb it may be a bit more challenging than before to find an affordable home, but it isn’t impossible. Budgeting now can help you build a safety net and gain a financial advantage when you are looking at properties in your target area. Now more than ever, millennial and Gen X homebuyers have to budget extensively before they can even start exploring the properties available. These tips can help you gain some security and confidence as you prepare to start looking for your next home.
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Use the 28% Rule
It’s suggested to use no more than 30% of your monthly gross income (earnings before taxes) on a house, but financial experts advise even less than that. By following the 28% rule, you can budget for a mortgage that’s within your means and find properties that won’t jeopardize your financial security in the future. To get an idea of how much you would spend as a homeowner, calculate 28% of your current pre-tax pay. Is this figure above or below what you currently spend on housing, and could you practically afford it with all your other bills?
Refinance Student Loans to Free Up More Money
Refinancing student loans helps adults save more each month without compromising their payment progress. Having a lower monthly student loan payment can free up room in your budget for other things, like your first mortgage. While refinancing existing loans into a new loan does mean starting an entirely new agreement, it also tends to mean lower monthly costs and lower interest rates. This makes it easier to pay off your debt faster in the long run.
Get a Handle on Your Personal Budget Before Buying
Just because you can afford a house, in theory, doesn’t mean it will be easy in real life. Before you apply for a mortgage and potentially lower your credit score, make sure that you have a detailed understanding of your current spending and expenses. Factors like childcare, transportation, groceries, and utilities can all change after you move. Consider how relocating and owning a house may influence other areas of your regular budget.
Don’t Forget the Down Payment and Good Faith Money
Buying a house isn’t just a matter of applying for a mortgage. You’ll need 3.5% to up to 20% of a home in cash before you can purchase a property. There’s also good faith money, which is a small sum of cash you put down to demonstrate your commitment to buying a home. Earnest money for buying a house is usually 1 to 3% of the home’s asking price. The good news is that if the sale goes through, you get your money back after closing.
Choose Your Must-Haves Wisely
There are a lot of things first-time homeowners want, but they often underestimate the cost of these desires down the road. You may be dreaming of a house with a sprawling backyard, but you’ll also spend several hundred dollars a year maintaining it. If your dream home has a pool, be prepared to spend at least $1,500 to over $3,000 a year keeping it up to safety standards. While it’s okay to take on some unnecessary amenities for your quality of life, you should always research how much owning a house will cost each month before you budget. This helps you better understand the true cost of homeownership before making an offer.