Establishing A “Real” Budget
Establishing A “Real” Budget
One of the most common mistakes first time homebuyers make is jumping into the emotional frenzy of buying their first home without first analyzing the financial impact and feasibility of the new mortgage payment on their finances.
Not finding out how the mortgage payment will affect your finances can lead to some very hard lessons, and a lot of stress in the household – which is unneeded.
The best place to start is a household BUDGET.
Definition: A BUDGET is not just a list of all your monthly expenses. (That is just a list.) A budget is a decision that is made by everyone that has access to household funds, agreeing to a set limit for spending each month.
One of the best ways to really understand what you pay out each month is to get your check register or a list of all the bills that you have paid over a year. Include things that are not monthly, such as car insurance or any other insurance, birthday and other holiday presents that you always buy each year, and anything else you can think of that you paid last year. Divide them up into categories, and take all of those expenses from the prior year and divide each category by 12. This is your monthly cost.
Once You Have An Accurate Budget In Place, Analyze Where You Are Without The New Mortgage Payment.
Q: Are you at a positive cash flow or negative?
If you are at a negative or less than $200.00 positive per month, you should probably think twice about purchasing a home at this time until you can get control of your monthly spending, or increase your income. You may get approved for a loan without following this advice, but you may also find yourself in serious financial trouble afterwards, and we would like to help you avoid that if at all possible.
Once you have a positive cash flow, take that amount and add it to your current rent payment. Unless something changes in regards to debts, spending, or income increase, this is the very maximum house payment that you will be able to afford. (I suggest keeping a $200.00 surplus each month at the very least if possible.)
Now Take That New Monthly Payment And Put It Into Your Budget.
Go to our online calculator at www.getmoneytree.com and play with some sales price numbers, etc. Once you find out what loan amount gives you a monthly payment that is in your budget, you can start looking at home prices in your area to see if that will fit your needs.
Before looking at any homes or contacting any Realtors or sellers, you need to get Preapproved. Few Realtors or sellers will consider an offer without a Preapproval letter, and you want to identify in advance any items that may hinder you from getting the loan program and terms you want.
When You Have Been Preapproved For A Maximum Payment
I would take the new monthly payment (including any taxes, insurance, or mortgage insurance) and subtract your current rent. Now set up some kind of “New House” account to put that money in each month so you can experience what impact that new payment will have on your budget. Do this for at least 2-3 months, and you should be prepared for serious house hunting.
By establishing your budget now and preparing for the house payment in advance, you can avoid a great deal of hardship in the future.
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