It seems I have found myself in the thick of house hunting once again. I say “once again” because I happen to come from a family that moved every few years when I was a child…and so preconditioned to do so I have perhaps unintentionally maintained the tradition into adulthood. In fact in my short lifetime I (or when I was young -my parents) have filled out a change of address form 25 times. This being the case I thought perhaps I would take a few posts to pass along a few tidbits I have learned over the years…and a few new ones I have come to learn recently.
Before you head to the bank for loans or drive neighborhoods picking your favorites, or meander through the home improvement stores to pick out paint colors…manage your budget!
When I say manage your budget I don’t mean ensure you can pay your current bills (although that is extremely important), I mean go through things with a fine tooth comb! Write out a list of your expenses. Start with your standard bills, the ones that you can’t change or deduct -rent (include energy, water, etc), CC debt, loans (cars, school, personal, etc). Now create a column for all the little things that you just can’t live without such as – phone, internet, cable, subscriptions (if you pay on it monthly put it here). Finally go through a few months of bank statements and really scrutinize how much you spend on the rest – food (restaurant and grocery store trips), gas (transportation), shopping (clothing, starbucks, books, games, hobbies, etc), and fun (what ever you do regularly mini golf, movies, theatre, etc).
Look over your total. Many people at this point will say “Oh my Gosh! I had no idea how much I really spent every month!” This will be followed up very quickly with “but of course I can cut most of these small expenses out.” This is where I want to throw up the warning flag. You may in fact be able to cut things out here and there, BUT be reasonable! In order to really regain that money every month you need to be able to give up those things permanently…not just until you get into a new home. If you can’t give them up permanently, don’t try to add that money back into the monthly pot. Now…how much money do you have coming in versus going out. How much do you really have each month to spend on a mortgage and all the little things that come with a house?
Many people simply swap rent for mortgage…don’t make this mistake! A house is far more expensive than the mortgage. You have house insurance, mortgage insurance (if you have less than 20% down- and if you are a first time home buyer that may very well be the case), closing costs on the home, increase cost of utilities including water (especially if you have a yard to maintain at your new home), possible HOA fee’s, and all the regular maintenance of home ownership including roof/gutter/paint/windows/etc. This may seem daunting at first, but owning a home is still a great idea. The important thing is you factor in these additional costs before you buy the home…so you don’t find yourself in sticky situation later.
In addition to ensuring you have enough money for the extra initial costs of buying and regular maintenance of a home you want to have some cushion at the end of each month for savings. This last step is crucial. It is important to have a little left over at the end of each month (once you have paid all the categories we discussed at the top) to account for accidents, unexpected needs, and life changes. You are single, or newlywed, or starting a new career now…but where will you be in the next few years? Are you planning to go back to school, get married, start a family, change careers, etc? All of these things will change your financial situation. If you know you are going to be making a change, don’t forgo the mortgage for rent…just make sure you plan for the extra expense up front. If you can, set a low budget and try to find the right home within that budget instead of finding the right home and then trying to make your finances work.
If you do things right, when you go to your lending institution you’ll be able to set a sound budget you can work with for years to come.
Coming up Next on House Hunting: Questions to ask your lender, what documentation to bring, and why you ask for an itemized report before you go.