If you are just getting started on the house hunting process, you are likely aware that deciding on your budget is the first thing to do…but it is also the biggest (and most difficult!) decision for the majority of buyers we work with. Deciding on your budget is no small feat—you not only have to consider the monthly payment you’re qualified for, but you also have to decide how large of a downpayment you’re comfortable making…all before you start seriously looking.
The good news is that every buyer has been there, we’ve helped many of them through the process, and we’re happy to help you, too! From deciding on your down payment amount to making sure you’re not overextending yourself from month to month, check out all of our tips for determining your exact house hunting budget.
How to Determine Your Down Payment Amount
Before you determine how large of a mortgage you qualify for, you should decide what amount you feel comfortable putting down as a down payment. Traditional advice states that a down payment should be 20% of the home’s cost, but that has quickly become an unsustainable target for most home buyers in high-cost markets. Many home loans now allow buyers to put between 3 and 15% down, with the average home buyer paying around 12%.
While putting down as much as possible may seem like the best move, it is important to remember that your down payment is not the only immediate cash equity you will need to put into a home purchase. In addition to the down payment, you will also typically have to pay closing costs, moving expenses, and any immediate repairs the home is in need of. When you consider how much cash you’re willing to part with up front, these big ticket items should be taken into consideration right alongside your target down payment.
How to Determine Your Monthly Payment Amount
Once you decide what size down payment you’re comfortable with, you can use an online mortgage calculator to get a rough ballpark of what type of monthly payment you might qualify for. You can also use the 28% rule to help you budget, which states that your mortgage payment should not be more than 28% of your gross monthly income. You should also take into account how much property taxes, home insurance, and private mortgage insurance (PMI) will cost in your area, as these will be added on to your mortgage payment each month.
While getting pre-qualified is the only certain way to know exactly what price of house you can afford, it is possible to get qualified for more than you would feel comfortable with spending each month. Be sure to give more weight to your desired mortgage spend than the number you are qualified for to avoid overextending yourself.
If you need help determining what budget is right for you or are ready to start your house hunt, we’re here! Contact us to learn more about the process today.
