Ask Renee: How to Come up with your Buying Budget

All right, we are going to focus on deciding on a budget for your home purchase, setting the foundations. So let's start with acknowledging that purchasing a home is obviously one of the most significant financial decisions you're going to make in your lifetime. Sometimes it's one of many, sometimes it is your one dream home, but in any case, it's a significant investment. It's obviously a thrilling journey to go through, a little stressful at times, but it is so important to embark on it with careful planning and well-defined budget. That's sort of a given, but not everybody knows how to get there. So in this blog, we'll guide you through the process of deciding on a budget for your home purchase and help you to start to make the financially sound decisions that align with your goals and, as importantly, your circumstances. So we're going to start with the first one. It's important to assess your financial situation, your current situation. It's obviously be the first step in determining your home buying budget. You're going to want to take a close look at your financial situation, both in terms of income, you know, making sure you take the time to calculate your household's monthly and annual income. What money do you have to invest in a home? Be sure to make— to include all of the sources of income. So whether that's salary, bonuses, if you have income from things like rental properties or investments. Look at all of that. You're also going to want to look at your expenses. So take the time, maybe in a spreadsheet or a list, and list out your monthly and annual expenses. Make sure you include things like your utilities, insurance, what is your cost of eating, whether it's groceries or eating out, transportation, whether it's insurance, car insurance, car payments, gas prices, and any discretionary spending you do. Those two things are going to give you a picture of your financial income, what, what you have free, and your obligations. Now you're also going to want to look at debt, so take stock of your outstanding debts. What obligations are you paying, whether it's student loans, credit card debt, car loans? Consider how these obligations are going to impact your, your free amount of money that you have to spend in your monthly budget, if you will. The next thing you want to do is look at your savings and down payment. So determine how much you have saved for a down payment. You very rarely can you buy a house without expending some amount of money up front, whether it's in closing costs, whether it's in the down payment, whether it's in some of the fees that come with paying in advance for insurance. So make sure you understand how much you have on hand to be able to put down, and not only the down payment at the time of closing, but there's earnest money that's due at the time of offer or shortly thereafter. A standard guideline is to aim for a down payment of at least 20% of the home's purchase value. If you're taking out a loan, this is really important because it It allows you to avoid private mortgage insurance, referred to as PMI. Consider affordability guidelines. So to ensure that your budget aligns with responsible financial practices, if you will, consider the following affordability guidelines. So look at your housing expense ratio. Financial experts often recommend that your monthly housing expenses— that's including your property taxes, your your mortgage, your insurance, should not exceed 28% of your gross monthly income. So just a general running rule, if you will. Look at your debt-to-income ratio, because your lender sure is going to if you're taking out a loan. Lenders typically look for a debt-to-income ratio, they call it a DTI, of 43% or lower. So DTI is a percentage of your monthly income that goes towards debt payments, including your mortgage. Account for other types of costs. So when you're deciding on your budget, remember that the cost of homeownership extends beyond the mortgage payment. You should also budget for things like property taxes. Now, maybe you're— if you've got a mortgage, they're accruing for that. Research the property tax rates in the area you're considering and factor them into your budget. So we typically say that you should count on your property taxes running you about 1% of your purchase price. That's not a hard, fast rule, but it's a general guideline. Homeowners insurance is another one, and, and that is a cost. Even though our property taxes are the lowest in the state of Florida, homeowner insurance for Florida in general is more money. So estimate the cost of homeowners insurance— insurance, I can't stock, which is typically required, especially if you have a mortgage. Consider maintenance and repairs. So we always joke about HOAs, and you know, we're spending money and we're giving money to the HOA. What they're doing is they're just accruing for future, um, uh, obligations under maintenance and repairs. Think about that for your own home. Allocate funds for ongoing maintenance and unexpected repairs. So a good rule of thumb is to budget anywhere from 1 to 3% of the home's value annually for maintenance. So we already talked about 1% for property taxes, another 1 to 3% to keep on hand for annual maintenance. If you don't have any in a year, that's great. But what you don't want to do is be caught with a big expense and no way to pay for it. Future considerations as well. So think about your long-term goals when you're setting your budget. So think about an emergency fund. I recommend maintaining an emergency fund to cover unexpected expenses or, you know, God forbid, a loss of income. Retirement savings— you want to make sure that you're continuing to save for retirement to secure your financial future. You don't want to be house poor, as we call it. Other financial goals that you might want to consider are things like saving for your children's education if you're at that season of your life, or paying off existing debt so that you're not just living month to month that way. Also, make sure you're— if you're going to do a mortgage, you're getting a pre-approval. Different than a pre-qualification. That's a whole nother discussion. But before you start house hunting, it's advisable to get a pre-approval from a mortgage. This process involves a lender assessing your financial situation and determining how much they're willing to lend you. It also often involves providing proof of those things, your income and your expenses. This can provide you with a more concrete budget and help you know what you have to work with. And then lastly, you're going to want to consult with a financial advisor. If you've got a CPA or you've got someone, a financial advisor that you're working with, it's going to be important. If you're unsure about the budgeting process or you need professional guidance, they're a great asset to you. They can help you make informed decisions based on your unique circumstances and your financial goals. So in conclusion, deciding on a budget for your home purchase is obviously a crucial step. Step that requires careful consideration of your financial situation and future goals. I will tell you, I work with very intelligent, experienced people in real estate as my buyers— my sellers too, but we're talking about buyers here— and there are still a lot of them that come to me for the first time not knowing their budget. And sometimes it's a methodical way for them to get to it, other times it feels like a a little bit of off the cuff, but doing that upfront due diligence can make sure you're not wasting your time. If you think your budget is X and then you find out it's Y, we could be looking at completely the wrong properties for you, and why do you wanna waste your time? Time is an asset. It's valuable. So by following these simple steps and being diligent in your planning, you can set a budget that not only allows you to purchase a home, but it ensures your long-time financial stability. Peace of mind, which is so important. Remember, a well-thought-out budget is the foundation for success and stress-free home buying experience. So it's a great place to start. I strongly encourage you to take the time to do it. I know it's not the fun part. Everybody wants to get looking online and going and seeing properties, but get your budget straight first. Have your eggs lined up in a row, and you're going to be much more efficient with your time and and, and have a more successful outcome. If you need any recommendations, if you are looking for a mortgage provider, I can always provide that to you. I can also be a sounding board. I'm obviously not a CPA, I'm not a financial advisor, but these are some good steps to get you started.