Teach Me Tuesday- Budget Edition Part One...
One of the scariest words in the English language.
It’s certainly never been one that I loved. But, we all have to admit that it’s necessary. Just for living, but especially if you’re thinking you want to buy a home.
Let’s break this budgeting thing down a bit…
Do you know what you spend every month? I mean, what you ACTUALLY spend?
Do you find yourself running out of money before you get paid, or close to it?
Are you saving what you know you should? For retirement? For buying that house?
It’s easy to just go with the flow, going out to dinner, shopping, etc, and feeling like you really didn’t have enough “extra” to save. So, how to staunch that flow? Where to start?
A great place to start with a budget is to flip it upside down.
In other words, instead of starting by taking your expenses and adding them up, then subtracting from what you make, try this- deduct the amount you want or need to be saving or investing FIRST. Then get it out of your day to day checking account. Set up an auto transfer to that savings or investment account, and just pretend it’s not there.
Then, and only then, start subtracting your monthly bills. Four walls first- shelter, food, utilities, transportation.
What’s left? There’s your “fun” money.
If there’s none, or not much, left, that’s another story… start looking to cut those items that are non essential. I can almost guarantee there are some. (True story- I just realized I’ve been paying $7 per month for an eFax service that I’ve only used once, and forgot to cancel after the free trial. Ugh.)
Planning for that purchase
So what is that “shelter” number? Is there extra in the budget that you can move in that direction? In other words, if your current rent is $1200, you just may be able to find a home you love and only spend $100 or so extra per month. That’s the good news!
Looking at those current budget numbers can really help you know exactly what you can comfortably afford.
But what else do you need to have on hand? Because we know it’s not just about the monthly payment…. Let’s ask Josh!
Quick fire Q & A with Josh Crowley at Liberty Mortgage
How do you determine how much house (and payment) you can afford?
Well first off, I ask what you would like to spend on a monthly payment and how much of a down payment you plan to have. Then, I work backwards to arrive at a purchase price. I also gather your income and debt obligation info to determine what is the maximum amount you could potentially borrow.
How much of a down payment do I really need?
Most people with decent credit can get into a house for as little as 3% down. If you are a veteran or planning on buying in a rural area you might be able to obtain 100% financing! There are significant savings when putting 20% down but it is certainly not a requirement.
Are there lower downpayment loan programs available?
As I mentioned before, if you are a Veteran you have access to VA loans which don’t require any down payment. USDA loans for rural homes do not require any down payment either. If you don’t fall into either one of these categories you can get into a home for as little as 3% or 3.5%.
How much do I need to have for closing costs?
Closing costs represent about 2-5% of the purchase price of your home. Closing costs are a catch all term for taxes, insurance, and attorney fees. These can be paid directly out of your pocket, paid by the seller, or financed at closing. Having a professional realtor and lender and your disposal will really help you make the best choices, so you can save the most money.
What other costs/ expenses will I have before closing?
Typically you will only have a few out of pocket expenditures before closing.
1. Earnest Money Deposit- Typically 1% of the purchase price. This is the good faith deposit that is collected upon signing a purchase agreement. It is held in an escrow account by your real estate broker or closing agent, and applied to your total cash to close at closing.
2. Home Inspection- Cindy can guide you with necessary inspections, but know that in most cases, you can have not only a whole house inspection, but as many specific inspections as you like, and are willing to pay for. Your out of pocket inspection costs generally run $500-$1000.
3. Home Appraisal- Typically around $500 This is for the bank or lender to determine the value of the home you are purchasing, and is usually paid outside of closing. (In other words, it’s often not a part of that “closing costs” number.)
Where do YOU want or need to start with your budgeting process? Have you been thinking for a while you’re ready to start looking at/ looking for homes and you’ve been steadily saving? Or are you just thinking you’d like to get ready, and just don’t know where to begin to determine what you can afford? Budgeting is key in either scenario.
Ready to get started? Reach out to either of us and let’s chat!
Josh Crowley at Liberty Mortgage- (804) 708-3490 or firstname.lastname@example.org
Or me, here or at (804) 690-8273 or email@example.com