Home Buying on a Budget

Regardless of your current income, coming up with a reasonable budget is always an essential part of the home buying process. Although homeownership can be difficult to achieve when you have a limited income, sticking to a budget and making wise financial choices can help. Like many people, you may find that your home is the largest purchase you will make in your life. Therefore, it is vital that you consider all of the different factors that go into determining your home-buying budget.

Many Americans with a limited income are under the impression that homeownership is out of the realm of possibility. However, purchasing a home is an investment that can pay off in the long run. At the same time, homeownership is a big financial responsibility and it should be considered carefully regardless of your income. Below, learn some helpful tips for buying a home on a budget without getting in over your head. 

Understanding the Costs of Purchasing a Home

Even though the list price on an available home is a good place to start when considering costs, there are many more important costs to keep in mind when purchasing a home. When you are ready to close on a property, you will be responsible for paying for more than just your monthly mortgage payments. Some additional costs that you should remember include:

• Your down payment, in addition to the cost of purchasing private mortgage insurance (PMI). PMI is typically mandatory if you make a down payment that is smaller than 20 percent of your total loan amount.
• One-time fees including property appraisals, property line surveys, underwriting, document preparation and direct wire transfers. These are usually referred to as closing costs.
• Additional ongoing expenses that the homeowner may be required to pay. These can include property taxes, homeowner’s association fees, utility bills and homeowner’s insurance.

Note: Certain websites that post home listings will attempt to estimate a property’s monthly mortgage, taxes, PMI and homeowner’s association fees. However, in many cases you will be required to calculate these additional costs by yourself.

Create Your Budget for Home Buying

As you prepare yourself to become a first-time home buyer, it helps to build a budget. This can show how much you will be able to afford for your mortgage payments and other costs. While you are coming up with your budget, you should take your current expenses into consideration. 

You should also budget in some extra funds, so you are prepared in the event that something happens to your new home that need to pay for. Overall, your home buying budget should include the following:

• The estimated cost of your mortgage payments
• The total cost of your bills such as utilities, insurance premiums and more
• Your monthly costs for food, transportation, clothing, gifts and entertainment
• Saving money for future expenses such as child care, college tuition and more

In an ideal budget, your income would be equal to or higher than the amount of money you would be spending on the total items listed above. If you find that your income is not enough to pay for everything on your budget, you may need to make adjustments in order to purchase a home. 

Look for Homes that Realistically Fit Into Your Budget

One of the most common mistakes that home buyers make during their search for a new house is not sticking to their budget. Although it is possible to get an affordable home loan to help with the purchase, the mortgage payments may exceed your budget and can cost you in the future.

Struggling to pay your mortgage can lead to other difficult financial situations. Namely, you may end up owing more than you can afford and can possibly end up facing foreclosure. In order to avoid committing this costly mistake, you should try to limit your search to properties that you will be able to comfortably afford. 

You may find several great homes available within your budget, but you must remain realistic about your search. Creating a list of must-haves and nice-to-have items and amenities in your home can help you remain within your budget.

Keep an Eye on the Real Estate Market

During your house search, you may find that some sellers are listing their properties for prices far above the average market value in the area. This can be for a number of reasons, whether a homeowner is adding sentimental value to their house or simply overstating some of the features and amenities. 

However, it is important to stay vigilant for overpriced properties by checking the selling price for other similar homes in the area. If you notice that a seller has overpriced their property, you can bring it up when you are trying to negotiate a fair selling price. 

On the other hand, it is also important to look out for red flags, such as homes that are listed at a price that is significantly below market value for the area. Always perform a home inspection before you purchase a new property to avoid any potential issues in the future.