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Creating a Budget for Your First Home Purchase

If you think you are ready to start preparing to buy your first home, congratulations! However, there are quite a few important things to consider before jumping in. Buying a home isn’t as simple as securing a loan and being able to afford monthly mortgage payments. It also involves other expenses such as homeowners’ insurance and property taxes. So, how do you determine whether you can afford a first-time home – and what is considered “affordable” for you?

Calculating Your Homebuying Budget

A good rule of thumb for budgeting for your first home is that your mortgage should not exceed 28% of your gross monthly income, although the Federal Housing Administration flexes that number up to 31%. By determining your debt-to-income ratio, which is what lenders will consider before providing a loan, you compare your overall financial expenses each month to your gross monthly income. For example, if your monthly mortgage comes out to be $1,000, and your other monthly expenses cost you $1,500, and you have a gross monthly income of $6,000, that puts your debt-to-income ratio at almost 42%, which is high according to the 28%-31% rule. Keep in mind, gross monthly income is pre-tax.

Consider Additional Expenses

The additional expenses that you will incur as a homeowner can make a seemingly affordable home pricier. It’s important to include all these costs when analyzing how much you can afford, which includes homeowners’ insurance, utilities, maintenance, repairs, and property taxes. Plus, most of these costs are ongoing expenses. So while you may be pre-approved for a home loan based on mortgage payments, that’s only one thing to consider. If you forget to include your additional expenses, you may find yourself digging into a financial hole.

Private Mortgage Insurance

Most lenders require homebuyers to pay an upfront down payment of 20% of the home price. If you can’t afford 20%, you may still be able to get a mortgage through private mortgage insurance (PMI). However, PMI will increase your monthly mortgage payment by approximately 0.5% to 1%, so you’ll have to consider those additional expenses with a lower down payment. If you can afford to make 20% on a less expensive home but only 10% on a pricier one, the less expensive home will reap you more benefits financially.

Plan, Plan, Plan

Many first-time homebuyers have a lot of shiny desires and dreams about what their first home will be, but if you don’t carefully plan you could easily miscalculate how much you can actually afford in a home. Renovations for older homes, utilities for larger homes, and maintenance on big properties can cost you a lot in the long run. So before you make the leap into homebuying, be extra diligent in your financial planning process. To help you with that, Republic Bank has expert bankers and financial professionals on staff to get you where you need to be and help you lay out your financial plan. Get in touch with us at 800-526-9127 and visit our library of resources for other helpful financial tips.

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