At Twin Home Buyer we understand there is so much that goes into making a home purchase. We aim to help people understand the home buying process and the myriad of details and considerations needed in order for a smooth transaction.
It is up to you to make smart decisions. We are cheering for you. We want to arm you with the tools and questions to ask in order to have a strong understanding of your financial situation. The decisions you make today will impact your tomorrow. Always remember to see the big picture. If you fall in love with a home that is slightly out of budget, the margin will become a burden snowballing into one headache after another. You have to be realistic. Be smart about your home buying budget.
How do you figure out your budget?
When you have your financials sorted, meaning you have collected all the previously mentioned documents from our blog figure out what is a quarter of your take home salary. You do not want your mortgage to exceed more than 25% of your net income per a month. If your mortgage, property taxes and homeowners insurance exceeds 30 percent of your net income, you are deemed house poor. In other words, you’re spending a substantial amount of your monthly income on home ownership expenses. Paying a mortgage is only one aspect to running and maintaining a home.
We benchmark 25% of your monthly net income to cover the mortgage, property taxes and homeowners insurance. We recommend having at least 20% down payment so that you do not need to have private mortgage insurance. Saving for your down payment, moving cost and closing cost is the hardest part. Most homebuyer’s fall short of having 20%. In fact, it is reported that the national average is a mere 6%.
For the purpose of this exercise let’s assume you are happily married or in a devoted long term partnership and both you and your significant other are working with a monthly net income of $9,600.00. Multiply that net income by 25% which leaves you with a monthly house payment that should not exceed $2,400.00.
The next step is using a mortgage calculator. There are plenty of free resources online to give you a ballpark. From there we suggest in our previous blogs reaching out to a mortgage broker to guide you.
For argument’s sake let’s say you put down 20 %, because that is what we will continue to encourage and you opts to secure a 15 year fixed mortgage rate with an interest rate of 4.808%(today’s national average), a 1.07%, property tax rate again the national average (In California it is .73%) top off your calculations with a homeowners insurance that runs around $1,400.00 per a year. You can realistically afford a home around $500,000.00, remember we want to avoid being house poor. We are assuming there are no HOA dues. Recap from previous blogs, the main way lenders decide how much you can spend on a mortgage is to look at your debt to income ratio.
Time to break down your expenses even further. Let’s look at some of the homeownership costs.
► Trash Pick up
►Maintenance: Budget roughly $1 per a square foot of your home for your annual maintenance cost. For a 3500 sf home that is a monthly breakdown of $292 dollars. Several trusted advisors suggest putting aside 1% of your home purchase price for ongoing repair and maintenance costs. ALERT: Maintenance and repairs is not the same as emergency repairs, your money tucked away for a rainy day, safety fund.
○ Lawn Care
○ House Cleaning
After you crunch those numbers for all the above mentioned, stick to the plan and find a home in your budget. Our advice has always been to make sure you have a clear financial understanding of what you can afford. We implore you to save 20% for a healthy down payment and understand there are additional costs to consider. Our added tip, the advice we constantly repeat is to have an emergency fund tucked away. It may be disappointing to work within your budget, most first time buyers do not create a strict plan and end up putting themselves out. If you follow the guidelines and have a realistic picture of what you can afford you will love your home that much more. We are here to help. We know things have changed in the last 40 years with student loans and personable debt skyrocketing. Do not feel run down by this guide, feel empowered by it. We believe in you, you can do it!