Budget for Home Purchase

by Sharon Cullars

If you are planning to buy a home in the near future, now is the time to start budgeting not only for the purchase but also for the expenses of home ownership. The mistake many potential buyers make is not including those future expenses in their budget and this oversight can lead to foreclosure.

First, you need to know the three different types of home ownership costs.

  • One-Time Costs include the down payment, closing costs and other expenses such as moving fees, utilities deposits and start-up charges.

  • Regular Mortgage Payments/Household Operating Costs include utilities, cleaning supplies, plus the expenses for homeowner’s insurance and property taxes.

  • Future Occasional Housing Costs include preventive maintenance, repairs, new furnishings, and home improvements.

An important step before you start creating your budget is to assess your current financial situation. First, request your credit report so that you can determine whether there is anything that would make a lender hesitant about lending you money. You especially should check for discrepancies so that you can ask for corrections.

The credit report provides such information as how promptly you pay your debts, what your income is, how long you have been with your present job and how long you have lived at your current residence. These are factors potential lenders will consider. To obtain a copy of your credit report, you can contact the credit bureau in your state (they should be listed in the Yellow Pages). If you recently have been denied credit, you can obtain a report free of charge.

Now you are ready to sit down and make an informal worksheet to help you assess your situation. You should ask yourself the following questions:

  1. What is your annual household income? To figure this divide your annual gross income by your average monthly gross income. Then subtract your average monthly deductions and you will have your average monthly net income.

  2. What is your credit situation? (the information from your credit report will help with this calculation) Look at your total long-term debt as well as the total due each month for debt repayment. Then calculate the percent of your average monthly gross income for debt repayment by dividing your monthly debt repayment schedule by your average monthly gross income.

  3. How are you using your household income? Add up your monthly debt payments, your living expenses (excluding Housing), housing expenses, savings and investments. Subtract these uses from your average monthly net income.

  4. How much money have you set aside for savings and investments? Take your current cash value of assets minus monies owed to get your current net worth.

Being able to see where your money is going will help you set goals for your savings and help you prepare to budget. This information will also help you when discussing your financial situation with a loan officer.

As with any budgeting process, you’ll want to pay down any heavy debts first. You can do this by moving any debt on high-interest credit cards to cheaper-interest cards.

If you have not done so, open a savings account specifically to deposit monies for your home purchase and expenses. Even putting aside as little as $20 a week will allow you to eventually build up a substantial savings.

Also, cut back on those miscellanies you can do without. Brown bag your lunches, forego those expensive dinners at your favorite restaurants or cut down on those trips to the moves. You’ll be surprised how much you can save by cutting back on the non-essentials.

Other options to consider:

  1. loans from family and/or friends

  2. selling securities you own or borrowing against them through a loan from the stock brokerage

  3. selling other assets

  4. withdrawing money from your IRA. A first-time buyer can pull out $10,000 penalty-free, although you will still need to pay state and federal taxes on it. If you are not a first-time buyer, take out the least amount as you will have to pay a 10% penalty as well as the income taxes on an early withdrawal.

  5. borrowing against your retirement funds, which may have rates as small as 2%

  6. looking into programs like the VA and FHA

  7. getting a lease option which allows you to rent now and buy the home after you have saved enough

  8. looking for foreclosure properties that require little or no down payment

Once you prepare your budget, you will be able to determine how much money you are willing to save and what other resources are available to you. When you have raised or borrowed enough money not only for purchase but for owner expenses, then the only thing left to do is hunt for that home you’ve been dreaming of. Here’s happy hunting.

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