Here are 8 questions for first-time homebuyers setting a budget
Buying a home for the first time can be exciting, but it often comes with a lot of intimidating questions and number crunching.
Knowing how to budget for the right home might sound complicated—there are so many moving parts—but it’s totally doable so long as you’re organized and prepared to answer the right questions. Know how much home you can afford by asking these 8 questions to help you on your homebuying journey.
What you’ll learn:
- The first steps to building a better budget
- How to calculate your recommended mortgage based on salary
- How to secure an affordable mortgage payment
- What kind of home loan might be right for your budget
- How your down payment impacts your mortgage payment
- How to calculate your mortgage based on your loan and down payment
- What other homebuying costs you should be budgeting for
- What to do if you can’t afford your dream home
How much house can I afford to buy?
This is the big question. Everyone wants to know how much house they can afford to buy based on their income. But before you can know how much house you can buy, you need to truly understand how much money you have. If you haven’t yet set up a detailed monthly budget, now is a great time to do that.
Don’t know where to start? Conduct a financial checkup. Use this free printable checklist to gather all the necessary financial information and then follow the easy steps laid out here. If you’re up for it, you can even take your budgeting a step further by following this year-long financial health challenge. With a new budgeting task every month, you’ll be a money master in no time!
Not only does conducting your own financial checkup give you an accurate snapshot of how much money you have—and will have when it comes time to purchase a home—but it also puts you ahead of the curve when applying for a home loan. Most lenders will need to see your recent bank statements, last year’s tax returns, and your current credit score before handing over the cash.
How much should my monthly payment be?
The Federal Housing Administration recommends that “monthly housing payments should not exceed 31% of gross monthly income.” Other blogs and lenders say 28% is the magic number. You will have to play around with your budget to land on a realistic number that works well for you. Take into consideration all your expenses and any debts you already have.
To calculate the mortgage payment you can afford, multiply your gross monthly income by 31 (or whichever percentage you’ve landed on) and then divide that total by 100.
So, let’s say your monthly income is $5,000 a month. Multiply it by 31 to get 155,000. Divide that by 100 and you get 1,550. Following the FHA’s recommendations, your monthly homebuying expenses should not be more than $1,550 a month.
Now that you have your monthly budget all sorted, plug that number into your monthly expenses to see if it works for you.
How do I get an affordable mortgage payment?
There are two more factors to consider when calculating the final cost of your mortgage: your home loan and your down payment. The FHA’s 31% recommendation may tell you how much you should pay for a mortgage, but you’ll need to know the amount of both your home loan and down payment to calculate how much you will pay.
In order to secure an affordable mortgage, you’ll have to get the best kind of loan for you. Here are the four different kinds of common loans:
This is the most common kind of loan. This loan meets the limits and requirements set by the Federal Housing Finance Agency. Every year the FHFA sets the conforming loan limit and it varies by state.
In November 2021, the FHFA announced a higher conforming loan limit for 2022, raising it to $647,200 for most of the U.S.
A jumbo loan is similar to a conforming loan but it offers a higher loan limit. It might be the right loan for you if you’re buying a home in a high-cost area such as a larger city.
The jumbo loan limit for 2022 can be as high as $970,800 in some areas. Because the loans are bigger, though, you’ll have to be able to meet stricter requirements such as a high credit score and a larger down payment.
- FHA Loan
An FHA loan is insured by the Federal Housing Administration. The government backs the loan so an FHA loan can accommodate smaller down payments and lower credit scores. The FHA loan includes an additional fee for Private Mortgage Insurance (PMI), but that’s not necessarily a bad thing. Read more about that here.
- VA Loan
This is a loan for active-duty service members, veterans, and eligible surviving spouses. You can learn more via the U.S. Department of Veterans Affairs.
How do I get the best loan rate?
In this blog post about homebuying tips, Flyhomes’ own Chief Operating Officer Ryan Dibble recommends shopping around.
“I recommend talking to at least two lenders, but ideally three or four. Ask each of them for a full written quote or an official loan estimate that gives you the full picture based on your specific needs. Having multiple options provides you with more certainty that you are getting a good deal. You might be able to leverage one lender’s quote to negotiate an even better deal with a different lender.”– Rydan Dibble, Flyhomes COO
To lock in your loan rate, you should also consider pre-underwriting. Pre-underwriting is the only way to ensure your home loan will be exactly what you expect it to be when it comes time to purchase a home.
You’ve seen lenders advertise big promises like “Instant pre-qualification!” and “Guaranteed pre-approval!” But pre-qualifying for a loan isn’t a promise. It just means a lender has looked at basic financial information to give you an idea of how much money they will likely qualify you for. Once the bank takes a closer look at your finances, though, they may decide to loan you less than initially estimated.
Pre-underwriting turns that big fat “probably” into a “definitely.” With pre-underwriting, the lender goes over all your financial details before the loan amount is decided, so there won’t be any unpleasant surprises later on in the process.
Read more about the difference between pre-approval and pre-underwriting here.
Do I need to pay 20% down for a lower mortgage payment?
Not necessarily! Putting down 20% on a home has been the standard for years. But according to the 2021 National Association of REALTORS Home Buyers and Sellers Generational Trends Report cited in this Flyhomes blog post, the current national median is just 12%. Some people even buy a home with just 5% down!
A larger down payment means you’ll have less to pay off in the long run, but a big down payment isn’t necessarily right for everyone. Making a smaller down payment now, with the right kind of loan, may make it easier for you to buy a house sooner or save some of your money for home owning costs like repairs, necessary appliances, moving costs, or even an emergency fund for peace of mind.
Read more about your down payment options here.
How do I calculate what my mortgage will be?
So you’ve set up your budget, you’ve estimated how much your home loan will be, you’ve secured your down payment, and you’re ready to calculate your mortgage.
We make it super easy to calculate your mortgage so long as you know a few key pieces of information: your credit score, the zip code of the area in which you’re hoping to buy, your price range, and your estimated down payment.
Plug all that info into the mortgage calculator here and we’ll will use the most recent mortgage rates to give you an up-to-date estimate.
What other costs should I budget for?
Buying a home costs more than just the mortgage payment. In order to ensure you aren’t hit with any surprise costs down the road, it’s also important to budget in items such as closing costs as well as any new expenses that come with owning your own home.
Your new place may come with extra bills you didn’t have to worry about as a renter, like garbage, water, home insurance, and property taxes. Utilities could really do some damage to your budget if they’re not accounted for.
What do I do if I don’t make enough money to buy the home I want?
If the numbers just aren’t adding up, that doesn’t mean homeownership is out of reach.
Every home buyer is different and every homebuying budget is, too. The best way to ensure you’re making a smart financial decision is to talk to a lender (or two or three!) about all your options. Establish a clear, comprehensive budget so you know exactly how much money you have coming and going each month, and don’t be afraid to ask questions.
We also recommends attending open houses. It’s never too soon to look! Besides, you may find you can afford more home in an unexplored neighborhood.
One more thing…
Buying a home will likely be one of the biggest financial decisions you’ll ever make. It may feel like there’s a lot of new information flying at you all at once, but it’s worth it to put in some extra time now to ensure your home, your loan, and your mortgage will be a good fit for you for the next five, even 10 years.
Creating a homebuying budget isn’t as easy as plugging some numbers into a calculator to find the golden number—there are several different things to consider. Ask questions and talk to a few different lenders to learn more about your options.
Ready to start that conversation with Flyhomes Mortgage? Get in touch here.
About the Author: Megan Seling is an author and journalist who has been writing about news, arts, and culture for more than 20 years. She lives in Nashville, TN with her husband and a beagle named Johnny Waffles. Her favorite room in her home is her kitchen — that’s where the snacks are. You can follow her on Twitter here.