Set Your Home Buying Budget

While it’s tempting to start looking at dream homes right off the bat, you need to paint a realistic picture of what you can afford so you’re not disappointing yourself. You need to determine your home buying budget first.

Factors That Determine Your Budget

• Income
• Credit History
• Debts
• Expenses
• Savings
• Loan Term
• Insurance Costs
• Taxes
• Down Payment

Income
Lenders consider your gross income—all income including salary, rental income, interest, capital gains, etc. before taxes are deducted—when assessing your eligibility. Gross income excludes some government bonds, Social Security benefits, certain gifts, and life insurance.

Credit History
Currently, the minimum credit score for obtaining a mortgage is 580. There are non-conventional loans that you can get without meeting the credit score minimum. We’ll discuss that more in the Mortgage section.

Debts
Your lender will calculate all monthly payments from debts—student loans, existing mortgages, credit card debt, and car payments—to other installment payments—child support and alimony. If your payments are too high, you may not be approved for a loan.

Expenses
Be realistic about your monthly expenses and deduct them from your income before you can really assess how much you can afford. Groceries, clothing, phone bills, leisure, car insurance, and discretionary expenses are all things to look at.

Savings/Assets
Your savings can go towards a bigger down payment, which means borrowing less and being more likely to get approved. Calculate how much money you have in savings, your mutual funds, and stocks.

Loan Term
Consider what kind of loan you’re looking for. You’ll end up paying less interest in a 15-year amortized loan, but your payments will be much higher than a 30-year amortized loan. Research the current interest rate and use a mortgage calculator to assess your monthly payments for different loan terms.

Insurance Costs
Many properties require you to pay a year’s worth of insurance upfront. Be sure to factor that into your closing costs.

Taxes
Depending on what state you’re in, transfer taxes cost anywhere between 0 percent to 2 percent.

Get transfer tax rates by state >>