Setting a budget is one of the first things potential home buyers should do to set themselves up for success through the purchase process. Two of the most important items to consider are cash to close and total monthly payment. The key is to find the right balance between the two as each affects the other.
Your ideal cash to close is crucial as it accounts for what are you spending today, not what are you spending over the next 30 years (that’s where ideal payment comes into play). Fortunately, there is a lot of flexibility with loans when it comes to down payment options. However, if you have a smaller down payment, you will have a larger loan amount, which in turn means you’ll have a larger monthly payment.
Also, don’t forget that there are closing costs that you’ll need to pay in addition to your down payment. Common closing costs can include but are not limited to appraisal fees, underwriting, and processing/loan origination fees, title insurance, title examination, homeowner’s insurance, property taxes and other items.
Another consideration is how much money will you need after your purchase. There may be some home improvements that you’ll want to make early on in your home ownership. You might also need to budget for furniture, moving costs, and even an emergency fund.
There are certainly a lot of things to consider when budgeting for total cash to close, but if the cost of purchasing a home feels overwhelming, it shouldn’t. There are also several down payment assistance options that can significantly reduce your cash to close.
Regarding monthly payment, there are many adages about what percentage of your total income should go toward your monthly mortgage payment. The issue with generalizations is different people have different priorities and different circumstances. Creating your own budget is imperative, as pre-approvals are based on what you can qualify for, not what you can afford. Consider how much money you need to maintain your preferred lifestyle in addition to your mortgage payment.
Start by determining how much income you currently receive. Then subtract things like how much you’ll need to save for retirement (always pay yourself first), paying off other debts, travel savings, meals, and entertainment, etc. Then consider what expenses you can reduce or eliminate because they aren’t helping you meet your goals (do you really need five video streaming subscription plans?). What’s left over is a good starting place for your ideal monthly mortgage payment.
While this process may seem overwhelming at first, determining your overall budget to buy a home will help guide you on the best path to meet your long-term financial goals. Real estate is a fantastic way to build wealth because it has the potential to appreciate over time and eliminate your rent payments. By taking the time to determine your budget you’ll position yourself to be a successful real estate investor, even if the only real estate you own is your home.
Last but not least, ensure you work with a Loan Officer and lending company that takes the time to understand your financial goals and help you create a plan for success. Mortgage smarter my friend!
Spire Financial (A Division of V.I.P. Mortgage, Inc.) brings lending expertise to you. All of our loan officers offer personalized communication for every client, guiding them through the process. We can show you ways to maximize your finances and unlock future opportunities. Spire Financial keeps you in control of refinancing, debt consolidation, and home equity. Together, we can achieve your financial goals.
V.I.P. Mortgage, Inc. DBA Spire Financial does Business in Accordance with Federal Fair Lending Laws. NMLS ID 145502. For state specific licensing, visit www.vipmtginc.com/national-licenses/. V.I.P. Mortgage, Inc. is not acting on behalf of or at the direction of the FHA/HUD or the Federal Government. This product or service has not been approved or endorsed by any governmental agency, and this offer is not being made by any agency of the government. V.I.P. Mortgage, Inc. is approved to participate in FHA programs but the products and services performed by V.I.P. Mortgage, Inc. are not coming directly from HUD or FHA. Information, rates, and programs are subject to change without notice. All products are subject to credit and property approval. Not all products are available in all states or for all loan amounts. Other restrictions may apply. This is not an offer to enter into an agreement. Not all customers will qualify.