Select Page

Buying a home is one decision you should never rush into. It may be the biggest purchase you ever make, and you’ll be paying it off over decades. While it’s important that you carefully evaluate any potential home so you know you’re buying one that you’ll be happy with in the years to come, it’s equally important to find a home you can afford. You may love the idea of one home, but living there will be unpleasant if you’re going into debt or working extra hours to make your mortgage payment every month.

How can you know if a home is within your budget? There are a few simple guidelines to follow which will keep you from overextending yourself.

1. Save a Sufficient Down Payment

To get the best interest rate on your mortgage, you’ll need two things: a high credit score and a large-enough down payment. How much is enough for a down payment? A good target amount is 20 percent of the home price, so on a $300,000 home, you’re looking at a down payment of $60,000. This is quite a bit of money, but you’ll have a smaller loan principal to pay off, saving you money over the term of the loan. Being able to save that kind of money is also a sign that you’re financially responsible enough to own a home.

There’s another reason to have a 20-percent down payment ready, and that is to avoid paying for private mortgage insurance (PMI). If your lender sees you as a high default risk, they will require that you pay for PMI, so you end up covering an insurance policy that doesn’t benefit you at all. With high credit and that 20-percent down payment, you won’t need to pay for PMI.

2. Make Sure the Monthly Home Costs Fit into Your Budget

When you own a home, you have four new costs to add to your budget, which are the loan principal, the interest, property taxes and homeowner’s insurance (PITI). Lenders typically will only approve your loan application if your PITI is 28 percent or less of your total income. Figure out how much you’d be paying per month for your PITI to see if it will be under that threshold.

Another guideline you can use is comparing your PITI to the rest of your monthly expenses. Your PITI generally shouldn’t account for more than 25 percent of your living expenses every month. There are exceptions, though. If you’re good at cutting costs and you live a frugal lifestyle, your mortgage may end up being more than 25 percent of your living expenses simply because you’ve lowered those other expenses so much, and that’s fine.

3. Set Aside Money for Home Maintenance Every Month

Once you go from a renter to a homeowner, there’s no more calling a landlord because something needs to be fixed. You’ll need to take care of that yourself, either by making the repair or hiring a contractor who can. This can be a good thing, especially if you’re tired of waiting for landlords to get around to fixing your sink or air conditioning.

To prepare for these maintenance costs, it’s a good idea to save 1 percent of your home’s cost per year for maintenance. If you own a $300,000 home, that means you should save $250 per month for a total of $3,000 per year. It’s another item to add to your budget, but you’ll be happy you did when a major repair is necessary.

Getting a Home You Can Afford

Saving a 20-percent down payment and setting aside money for home maintenance every month may sound difficult, and they can be, but they will put you in a more financially stable position. Emergencies and unexpected issues will happen, the only thing you can control is whether you’re prepared. Focusing on saving money and purchasing a home that fits your budget will ensure that you can afford your bills every month and if something breaks, you have the money to cover it without going into debt.