Creating Your Budget
When it comes to mortgages, you may technically qualify for a certain amount… But that doesn’t mean the amount is ideal for your lifestyle preferences. Your Mortgage Consultant is able to help you determine how much you can afford vs how much you realistically want to afford. However, if you want to get a head start at taking a deep dive into your budget here are a few areas to consider:
The “Golden Rule” of 28 & 36
The most common guideline suggests you should not allocate more than 28% of your gross monthly income to your monthly housing payment (this includes the mortgage payment plus insurance, property taxes, etc.). An easy way to determine your maximum payment is by using this formula: Gross monthly income X 0.28 = Maximum Monthly Housing Payment. So if you earn $60,000 each year before taxes you are taking home $5,000 pre-tax each month. If you multiply $5,000 X 0.28 that would tell you that you shouldn’t spend more than $1,400 on your monthly housing expenses.
Now, it’s super important to make sure you also factor in your debt. Your total monthly debt payments should not exceed 36% of your gross monthly income. If you’re earning $60,000 each year before taxes you are taking home $5,000 pre-tax each month. If you multiply $5,000 X 0.36 that would tell you the maximum amount of debt you should pay each month is $1,800. If you subtract the previously calculated $1,400 of monthly housing expenses from your maximum monthly debt payment of $1,800 that shows you shouldn’t have more than $400 worth of debt outside of your mortgage each month. If you do have more than $400 in debt each month, you would then lower the amount you are willing to pay in housing expenses each month. Maybe your car payment is $600 each month; you would then lower your housing budget to $1,200 each month. In short, here’s your formula for calculating your maximum monthly housing expense amount: (Monthly Gross Income X 0.36) ‒ Any Monthly Debt = Maximum Total Housing Payment.
While this is a rule of thumb, it does not apply in all cases. Work with your loan professional to get the most accurate picture for what you qualify for.
Keep in mind there are other monthly costs that you should consider when creating a budget.
The Possibility of Homeowners Association Fees
Certain areas and home types have a Homeowners Association Fee (HOA). This fee varies depending on the amenities and services offered, but you can generally expect around $150 – $350 a month.
With homeownership comes routine maintenance. It’s a good idea to set aside about 1% – 4% of your home’s value each year to put toward that “someday” maintenance. You need to be financially prepared to fix a leaky roof or repair a furnace at a moment’s notice.
You can’t forget about those monthly utility bills! Take into account that you will be paying for electricity, gas, trash and water. This is hard to estimate for a place you’ve never lived before, but you can always ask people who live in the area in similar sized homes what they pay in an average month.
Lifestyle & Other Living Expenses
Don’t forget about things like health insurance; car expenses such as gas, upkeep and insurance; groceries; family costs for kids and pets; retirement and emergency savings; and entertainment and travel expenses. These are all part of the can vs want to afford scenario. If you want a bigger mortgage, you might need to cut your budget for non-necessities.