First, if you know just how much you can allot to your home-buying budget, you will instantly stay away from those properties that you cannot pay for. This will save you from creating unrealistic expectations. It is always advisable to look for houses at the bottom of the your available fund. Through this also, you may start appreciating those properties that fall within your price range.
Second, you will know which amount you are comfortable to pay. Banks and agents will encourage you to max out on the loanable amount. So, while you may have a disposable income right now, know that it will slowly be consumed once you move into a new house because of additional household expenses and adjustments. This also ensures that you only borrow what you can pay in the future since the bank, for instance, can only access what financial information are provided on the application forms.
1) Calculate the household’s gross monthly income. Lucky for you if you will have a sister or brother who is willing to share the burden.
2) List down all the recurring household expenses (bills). These are what the household members pay on a monthly basis. Next, list down all the intermittent payments (insurance, etc.). If you are not sure of the items, consult your bank statements and credit card statements.
3) When you list down the item, you might as well separate the necessities from the optionals. You can also add another column that is the necessary yet flexible. These are the grocery and phone bills.
5) Listing down every additional expense can be daunting. You may consider visiting your target neighborhoods and ask them. You can also ask your agent for reasonable ideas.
6) You should list down the expenses that will be removed once you moved out of your current home such as the monthly rental payment. Cancel anything that the household members can live without, freeing up more funds for the monthly amortization.
7) Determine what is left after factoring in the expenses and also the savings and emergency funds. Savings must be regarded as a non-negotiable expense. You can now determine how much you can devote for the housing needs.
Ask yourself again: AM I READY? By now, you know the answer. Nonetheless, you can still defer your plan to buy a new house until you have saved up for down payment. The down payment is usually between 10 to 20% of the purchase price. If you can pay for this at once, much better because that means lower monthly amortization for you.
Whatever your decision may be, the bottom line is you need to be realistic. And don’t borrow more money that what you can pay. This is perhaps the biggest mistake that home-buyers make. Anyhow, you will feel ready when that time comes. And when that time comes, you are already financially prepared.