Creating Your Homebuying Budget

The best place to start when you are creating your homebuying budget is with a mortgage affordability calculator. This online tool can offer you more insight into the costs associated with purchasing a home. You can enter information regarding potential home prices, down payment amounts, loan terms, and even interest rates. The calculator will then provide an estimated total monthly payment. While it is not an official loan estimate you will at least have a number in mind you can start preparing for.

However, there are a number of costs to consider when buying a house. Let us take a deeper look at each one.

Improving your credit score

The earlier you start preparing your finances for a home purchase, the better. The first number you want to look at is your credit score. This is because your credit has a significant impact on your loan approval and potential interest. Higher scores often give borrowers access to better rates, so you will set yourself up for more savings in the long run if you can take the time to improve your credit score before applying for a mortgage.

There are two things you can do right off the bat to address your credit: Pay off as many debts as possible (though this does not necessarily guarantee an immediate improvement to your FICO score) or, at the very least, reduce your debt to a favorable debt-to-credit ratio. For example, if you have $5,000 as your credit limit and your balance is $4,500, you only have $500 available credit. Whereas someone who has the same $5,000 limit but only a $500 balance might have a slightly better score assuming both people have paid their bills on time.

As you move through the homebuying process, be sure to keep your credit and spending in check. Your lender will also be keeping an eye out for any significant changes, and if they see a major change then they may not be able to approve your mortgage.

Start saving for your good faith deposit

Once you have found your home, you typically need to provide some cash as a good faith deposit to go along with your offer.  This is called earnest money. It might be a fixed amount in some areas, as much as $5,000. In other areas, it might be a percentage of the overall sale. The good news is that this money may be refundable based on the terms of the sales contract, or it may be applied to your down payment upon purchase.

The value of this payment and why it might be good to place more down is that you are asking the seller to take their property off the market. In a competitive market, placing more earnest money down is a sign you are serious and perhaps might help get your offer accepted compared to another offer.

Prepare for the costs of the appraisal and home inspection

Once your offer is accepted, the process of checking out the home more seriously begins. Your lender will order an appraisal of the property to ensure that the loan you are asking for is in line with the value of the home. You may also need a series of separate inspections to ensure the home is worth purchasing and to be made aware of any potential defects or repairs that may need to be addressed before the sale. The results may make you change your mind about buying altogether or it may nudge you to negotiate for a lower price.

An inspection will look at nearly all aspects of the home, such as:

• Roof

• Electrical

• Appliances

• Plumbing

• Fences

• Pest damage

• Foundation issues

• Safety hazards

• Windows and doors

• Rotting

In addition to a home inspection, you may need to request additional inspections based upon your area and the local requirements. For example, you may need or want inspections that address the following:

• Pests (including rodents and bugs)

• Mold

• Radon Gas

• Pool

Total appraisal and inspection fees can vary, but you should do your homework to understand the costs in your area.

Determine your down payment amount

Down payments for a home purchase can range from $0 with a VA loan to 20% (or more) of the total purchase price of the home. If you are applying for a conventional loan, you may hear that a 20% down payment is the general rule of thumb. However, this is because that amount can help you avoid paying for private mortgage insurance (PMI). In most cases, lenders may approve borrowers who are not able to provide the full 20%, just know that you will be required to pay for PMI.

With a VA loan, down payment requirements are dependent on your remaining entitlement on your Certificate of Eligibility (COE). If you qualify, you may have no down payment requirement. A VA loan will also help you avoid private mortgage insurance (PMI). Keep in mind, there may be a VA funding fee, but a VA loan can be a great option after considering your financial situation.

If you place less than 20% down and do not have a VA or FHA loan, you are likely to need some type of mortgage insurance. While it is a traditional rule of thumb to put at least 20% down, in today’s housing market, that is not always possible. FHA loans are another mortgage type that can offer a wider range of homebuyers the means to put down as little as 3.5%. But they also require you to pay a one-time upfront mortgage insurance premium (UFMIP) at closing as well as a monthly mortgage insurance premium (MIP).

Be ready for the closing costs

You should budget for closing costs to be somewhere between 2% to 5% of the total loan. While 2% to 5% of your total loan can add up on top of other costs, there is a lot happening behind the scenes to make your loan happen. Here is a list of fees and costs that may be included in your closing costs (though this list is not all inclusive and may vary from lender to lender):

• Origination fees

• Underwriting costs

• Application fees

• Courier fees

• Title-based fees

• Title search

• Title settlement

• Title insurance

• State recording fees

• Prepaid fees may include:

• Property taxes

• Homeowners insurance

• Homeowners association fees

• Interest

• PMI or mortgage insurance

• Escrow fees

What if you are buying and selling at the same time?

As you prepare to purchase a home, you may need to get your current residence in tip-top shape. Oftentimes, your house looks the absolute best the day you move in and the day you sell it; having a home that attracts buyers is key. Here are some things to consider if you are selling a home:

• Repairs or maintenance needed to sell

• Plumbing

• Roofing

• Fencing

• Utilities

• Electrical

• Painting

• Improvement of curb appeal

• Painting

• Landscaping

• Roofing

• Fencing

• Driveway

Even if you are not selling and buying a home at the same time, it all can still feel like a lot of expenses and budgeting. Do not let it detract from your excitement, though. Becoming a homeowner is a big responsibility, but it is a worthwhile endeavor that can open a number of financial opportunities for you and your family.

The important part is to have your homebuying budget in mind and stick with it. You can always reach out to a trusted lender for more information and guidance as you begin your own homebuying journey.