How to Calculate Your Housing Budget When Buying Your Dream Home

home buying concept
  • Understand conventional mortgage options and their associated costs like interest rates, down payments, and closing fees. 
  • Calculate your gross monthly income and debt-to-income ratio before determining your housing budget. 
  • Use the 28/36 Rule to determine what percentage of your gross monthly income should go towards your mortgage payment (28%) and total debt payment (36%). 
  • Consider additional costs like utilities, maintenance fees, and home improvement projects when calculating your housing budget. 

Buying a home is a vast and exciting milestone in life, but it also comes with many financial responsibilities. One of the most important things you need to do before you start house hunting is to calculate your housing budget. Doing so will help you determine how much house you can afford and ensure that you don’t end up biting off more than you can chew. Here’s how to calculate yours so that you can buy your dream home without breaking the bank.

Research Conventional Mortgages:

mortgage loan agreement application

Before you start crunching the numbers, you need to understand what kinds of mortgages are available. Look into affordable conventional mortgages and compare their interest rates, down payment amounts, and closing costs.

This will give you a better idea of how much money you’ll need upfront in order to secure financing for your dream home. For instance, if you’re looking at conventional mortgages that require a down payment of 20%, you’ll want to know how much that would be in comparison to other loan options.

Remember that you’ll need to pay closing costs on any home loan, so be sure to factor these into your budget when calculating how much house you can afford.

Make a Rough Budget:

Now it’s time to get an idea of your monthly budget. Start by making a list of all your fixed expenses, then take into account variable expenses and so on. Here’s a rundown of each major step:

Determine your gross monthly income.

Your gross income is the amount of money you earn before taxes and other deductions. In order to calculate your housing budget, you need to know your gross monthly income. Add up all the income you earn in a month, including your salary, bonuses, and any other sources of income. This will give you your gross monthly income.

Calculate your debt-to-income ratio.

Your debt-to-income ratio is the percentage of your monthly income that goes towards paying debt. You can quickly get this by dividing the amount you pay for your debts per month by the amount of income you earn each month. This includes any credit card debt, car loans, student loans, and any other debt you may have. Generally, lenders prefer that your debt-to-income ratio be below 43%.

Determine your monthly housing expenses.

Your monthly housing expenses include your mortgage payment, property taxes, home insurance, and any homeowners association fees. To calculate your monthly housing expenses, use a mortgage calculator to estimate your monthly mortgage payment. Add your property taxes, home insurance, and any homeowners association fees to this amount. This total will be your monthly housing expenses.

Calculate your housing budget.

person using big calculator to compute for budget at home

To determine your housing budget, use the 28/36 Rule. This rule states that your mortgage payment should not go above 28% of your gross income each month, while your debt amortization monthly should not go beyond 36%.

For example, if your gross monthly income is $5,000, your mortgage payment should not be more than $1,400 (28% of $5,000), and your total debt payments should not be more than $1,800 (36% of $5,000). Subtract your monthly debt payments (including your mortgage payment) from your gross monthly income. The amount you have left is your housing budget.

Consider Additional Expenses

While the 28/36 rule is a good starting point, it’s essential to also consider additional expenses such as utilities, maintenance costs, and home improvements. Make sure you factor in these other expenses when calculating your housing budget to ensure that you can afford all of the costs associated with owning a home.

For starters, utilities can add up quickly. Make sure you check with your local utility companies to get an estimate of what your monthly bills might look like.

Additionally, you may want to budget some money for maintenance costs and home improvements. This way, if something goes wrong or you want to make any changes to the property, you’ll have the funds set aside for it.

Knowing how to calculate your housing budget is essential for anyone looking to buy a home. By following the steps outlined in this blog post, you can determine how much house you can afford and avoid getting in over your head financially. Remember that while the 28/36 Rule is a good starting point, there are many additional expenses to consider when owning a home, so make sure you do your research and factor in all costs before making a purchase. With a little bit of planning and careful consideration, you’ll be able to buy your dream home without breaking the bank.

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