If you are planning to buy a new home, one of the first steps is to get pre-qualified with a local lender. However, how much can you really afford? The answer may not necessarily be what the lender is willing to approve you for. Though the level of approval is a good guideline, you will also need to take a detailed look at your monthly budget so you are certain you can adjust financially to home ownership.
Calculate your Income: The first consideration before entering into a new home loan is your combined household income. For becoming pre-qualified, the lender will usually look at your gross income before taxes are taken out. For budgeting, it is important to look at your net income; how much you take home after taxes. If you are self-employed or work on commission, you may not take home the same amount each month. If this is the case, do not be too optimistic.
For example, if you took home between $3000 and $4000 for the past 6 months, do not assume that you will bring home $4000 or higher the next 6 months. Either average out your income for the past 6 months or better yet, take the most conservative figure and assume an income of only $3000 per month.
Calculate your projected Fixed Expenses: Fixed expenses are those that will not change from month to month. These include:
- Mortgage, Interest, Taxes & Homeowner Insurance
- Auto Loan(s)
- Credit Card Payment Minimums
- Auto, Life, Health and Other Insurance
- Phone & Cable TV
- Utilities
- Water Bill
- Homeowner Association Fees
Your fixed expenses may vary depending on the type of home you buy (single family home verses townhouse/condo for example) and the age of the home, which can affect the cost of utilities. If you are uncertain about some of these costs, always err on the side of caution. In other words, project a higher expense for these items and benefit later if they come in lower.
Calculate your projected Variable Expenses: Your variable expenses are items such as food, gas/transportation, clothing, gifts, entertainment, vacations, etc. It is best to examine your current habits and assume these will continue. For example, if you eat out twice a week now, it is fair to assume you will do the same when you move into your new home. Project your variable expenses accordingly.
Other Considerations: When planning your budget, you will also want to have enough left over for unexpected expenses and savings. Look at your current situation in both of these areas. How much are you putting down on the home? How much will you have left after the down payment for emergencies? How much do you have in additional savings and investments? Finally, will your new budget as a homeowner allow you to continue to save and invest at your current level?
Becoming pre-approved for a home purchase and setting up a workable budget for after the purchase is an area that will require some careful planning on your part. For additional guidance, speak with a mortgage lender to find out for how much you can (and should) be pre-qualified.