Homebuyer Series Step 3 to Homeownership: Home Purchase Budget Tips

home purchase budget tips
Budget your income and expenses so you can buy your first home

Home Purchase Budget Tips

In the last article (step 2), we explained lots of unique tips to save money for a down payment and an emergency fund.  Today we are providing solutions to the # 3 Roadblock mentioned for first time buyers which is NOT having a budget in place.  These home purchase budget tips help to afford the mortgage payment and upkeep which come with homeownership.

Let’s face it, Budgeting is Tough!  We want satisfaction from buying something now and not when we have saved up enough money to buy it!  To solve this common issue or habit, let’s talk about these home purchase budget tips in detail.

*  Creating a budget that will allow for a home purchase & savings

*  Qualify under a safe debt to income ratio for any mortgage product

*  Determine which type of payment you can afford

Tips for Creating a Budget to fit in a house payment comfortably and save money for your future:  Before buying a house, investing in retirement, or other important milestones, know your numbers!  Calculate income, expenses, and the bottom line as a beginning to a desired result.  For great budgeting tips, check out Dave Ramsey.  He offers some great tools for budgeting.  Some may be extreme.  But many of the tips and tools are overall, great tools and tips for creating a budget and a more importantly, a life.

Budget Steps to Understand Your Finances

  • Sign up for Start My Budget and then fill in the blanks.  You can also download the App after signing up
  • Take control one step at a time.  Click here for The 7 Baby Steps.  All of these are not required, especially paying every debt to qualify for a mortgage.  But there are still some helpful home purchase budget tips.
  • Once a budget is created, determine where the money goes.  To purchase a home, often there needs to be some changes to spending habits.   Instead of going out to eat so often, move that money to home ownership!
  • Look for creative ways to save a lot of money and a down payment fast!  Read Tips to Save up to $40,000 in a year!

How to Lower a Debt to Income Ratio for Mortgage Qualification

Mortgage loans, among other things, go by your debt ratio.  Debt to income ratios are determined by dividing monthly debt payments by gross monthly income.  The lower the debt ratio, then the better chance of a loan approval.

  • First of all, having no open accounts is a bad thing.  Having accounts that have been open a long time with very low to no balances and a good pay activity is a very good thing.  So keep debts down
  • If you have credit cards or lines of credit, try to get them paid off or down to a low amount compared to the credit limits as this will lower the minimum payments required and will help your credit scores.  Keep in mind that even if you pay off a balance in full, the minimum payment required will report and be counted in your debt ratio
  • Do not open new loans just before or during a mortgage process as an extra $200 – $500 loan payment for example could cause a debt ratio to be too much and could potentially cause a denial
  • The old rule of thumb was to keep your debt ratios at 28 / 36%.  Your total housing payment no more than 28% of your income and total debts no more than 36% of your income.  Almost all programs today will allow the mortgage payment to be in the 30’s or higher and the total debts to be 45% or higher with strong compensating factors.  Again, the lower the debt ratio, the better chance you have of approval.

Which Payments are Considered in a Debt to Income Ratio?

First of all, not all bills are included in a debt ratio calculation.  Understanding these debts helps implement these home purchase budget tips better.

  • Here are most of the items included in debt ratios:  credit card payments, installment loans such as auto, personal, or others (whether on the credit report or not), mortgage payments (including principal, interest, taxes, insurances, and PMI if applicable), HOA dues, monthly payments to the IRS or State for taxes due, childcare expenses (VA loans only), maintenance/utilities (VA only & calculates this at .14 x heated square feet), wage garnishments showing on paystubs for employee loans and such.
  • Payments usually not counted in a debt ratio:  insurances (other than property insurances), income taxes (VA does require lenders to factor in the residual income calculation), retirement loan payments, utilities (other than the VA calculation above), groceries and other household items.

How Much Payment Can I Afford?

There are lots of payment options for homebuyers today.  They include fixed payments of various terms, adjustable payments that start of lower and increase over time, and then payments that include potential extras such as taxes, insurances, and PMI or Annual Fees.

  • Fixed rate payments are usually higher than adjustable rate products in the beginning but give buyers more predictability and reliability.  Most buyers, especially when rates are low, choose a fixed rate payment to avoid the uncertainty of a rising payment.
  • Adjustable rate payments will generally start for a few years (3, 5, 7, or 10) at a lower fixed rate.  But after the introductory period has expired, the rate and payment can fluctuate over time.  These adjustments do have caps (maximums) over the remaining years though.  When considering an Adjustable Rate Mortgage:
    • Ensure the future payment increases will still be affordable
    • Learn the limits or caps for the mortgage and plug them into a budget.  Does it work with your future income?
    • Don’t assume income increases will take care of higher payments.  Instead, use raises as an opportunity to put more money into savings
  • Even if property taxes and insurance are not escrowed, include these amounts in the budget.
  • Taxes and insurance can change over time.  It is best to plan these payments will increase.  Keep in mind that even fixed interest payments will increase because of tax and insurance fluctuations!
  • PMI or Annual Fees will decrease or completely drop off over time.  As this portion of the payment decreases, add that savings to pay down the principal.  To further implement our home purchase budget tips, read “When Does PMI Stop on FHA, USDA, and Conventional Mortgage Loans”.   This is an affordable way to pay off the mortgage quicker and save interest.

Ways to Lower a Debt Ratio Quickly for Mortgage Qualification

A low debt to income ratio is a key part in mortgage qualification.  This is why we have included this topic in our home budget purchase tips article.  If buying a home soon, it is important to have a low debt ratio percentage.  But be careful!  It is best to contact one of our loan officers to strategize a plan for qualification.  For some borrowers, it is more important to have extra assets in reserve to qualify.  Where other borrowers need to lower the debt to income ratio to qualify.  For each situation, it could be different.  So consult with a professional.  Check out these tips to quickly lower a debt ratio.

  • Pay down credit card debts to a minimum which accomplishes the following.
    • Increase credit scores.  This is 30% of a credit score!  Read more about scores here
    • Lowers the minimum payment reported on credit.  Minimum payments are used in calculating a debt ratio
    • Both of these tips will help buyers qualify for a higher purchase price if needed.  Additionally, these may help in qualifying period.
  • Pay off high rate or high payment loans.  Compare a $200 payment on a loan of $3000 and a $200 on a house payment.  $200 on a house payment could help you qualify for $35,000 – $40,000 more approximately.  Makes sense, doesn’t it?
  • Ask for a raise at work.  An hourly or salary raise is counted immediately by lenders in a debt ratio calculation.  So Ask!

Learn More About Mortgage Qualifications

We hope that you enjoyed Week 3:  Homebuyer Series:  I Want to Buy a Home – In a Year or Less!  Your Roadmap to get home – home purchase budget tips.  So follow these tips to gain greater buying power and lower payments.

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We can help you prepare for mortgage qualification!

Read the other articles in the Homebuyer Series – I want to buy a home in a year:

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Written By: Russell Smith