We’ve all heard cautionary tales of new homeowners who have ended up “house poor.” Yes, their homes may be gorgeous and enviable, but that asset is all they have. But in reality, they’re struggling to afford their homes and live their lives comfortably. And, if there’s one thing you don’t want to do as a buyer, it’s to find yourself in a similar position.
Here are the steps you can take during your home search to ensure you find a home that works with your wallet and keeps you comfortably in your budget:
1. Shop below your maximum pre-approval amount
Once you go through the process of getting pre-approved, you’ll receive a letter that states how much money the lender is willing to loan you. Many buyers, especially those who haven’t bought before, make the mistake of shopping for homes up to that amount.
In reality, this figure is not a suggested price range. It’s the absolute maximum you’re allowed to borrow.
You don’t have to spend that much, and in fact, we suggest that you don’t.
A smarter plan, especially if you’re concerned about taking on a mortgage, is to work backwards.
First, find a monthly payment that makes sense in your budget. Then, see how big of a loan that payment will allow and use that as your maximum. To do this, you can use a mortgage calculator to play around with different loan amounts, down payments, and loan terms until you find a scenario that works best for you.
After you’ve found your sweet spot, don’t forget to see how a payment of that size affects your monthly budget as a whole. Ideally, you’ll land on an amount that allows you to become a homeowner while still being able to fund the other aspects of your life.
2. Don’t forget closing costs
Remember, your monthly mortgage payment and initial down payment aren’t the only costs that you have to shoulder as a buyer. There are also closing costs to consider. These fees account for all of charges incurred during the course of the transaction and cover anything from the cost of inspections, to title insurance, or the cost of retaining an attorney.
Traditionally, these fees will amount to around 1%-2% of the home’s purchase price and will be split evenly between the buyer and the seller. However, in some cases, the seller will agree to take care of the upfront costs and allow the buyer to tack his or her portion onto the mortgage, which means repayment can occur over time.
In either case, it’s still an additional cost to consider as you budget for your new home.
1%-2% of the home’s purchase price may not sound like a lot at first, but it typically ends up amounting to a few thousand dollars. It all adds up.
3. Be realistic about renovations
When you’re shopping for a home, buying a home that needs a lot of work can seem like a great idea.
For one thing, properties in need to TLC often come with a much lower - and more attractive - sale price. For another, undertaking these projects offers you the chance to put your own personal stamp on the home. However, be aware that renovations often come with a much bigger price tag than you might think.
If you’re not particularly handy, you’ll likely need to hire professionals to handle both of the work. That alone will inflate the cost. Not to mention that any estimates you get are just that: estimates. Often, extensive renovations will come across an unexpected detail that ends up costing more. When all is said and done, renovations can sometimes end up costing more than just buying a turn-key home in the first place.
To keep yourself from getting in over your head, it’s important to be realistic about the size and scope of renovations that you’re prepared to handle.
Ask yourself: Do you have the funds to start these projects immediately or does it make more sense to find a home that’s livable and renovate over time. Then, search accordingly.
4. Factor in upkeep & maintenance costs
Realistically, settling into your new home is just the start of the costs. As you live in it, you’ll undoubtedly encounter recurring costs for its upkeep that you’ll have to pay.
If your goal is to avoid becoming “house poor”, your best bet is to think long-term and account for these costs from the start.
In this case, you should focus on both annual fees like property records and monthly ones like utilities. Here, the seller is your best resource. He or she should be able to provide you with estimates of these costs to factor into your budget.