When I mentioned in a previous post that we were going to take our time house hunting, I meant it. It’s been a month since we starting officially looking, and we still haven’t found our home yet. We’ve been taking things at a leisurely pace, which suits us, and is also indicative of the low-inventory market we’re in.
I wrote about how before we even started looking, we went through the pre-approval process with our financial institution. I went over what types of documentation we needed to get that done. However, I didn’t get into how we determined how much we were going to be looking to spend on a new home. Even though we’re second time home-buyers, we still spent some time assessing our situation and needs before even talking with a lender.
Some things to consider in determining your purchase price budget:
1) How much can you put down? These days, if you put down less than 20%, you will have to pay Private Mortgage Insurance to your lender. Less than 20% means you are more risky, and so you’ll have to factor this in to your monthly payment. So, what is your budget if you put down 20%? What is it with 15%? How does that affect what you pay monthly?
2) In addition to your down-payment, you’ll want to account for closing costs. In a buyer’s market, you can often write this in to an offer that you make on a home. However, as this increasingly becomes a seller’s market, many sellers will not consider covering a buyer’s closing costs. Closing costs depend on your geographical location and the amount of the home you intend to buy, so ask your financial institution what to expect.
3) How much do you have in reserves? Even after all of the above, you should have a financial cushion left over between your various accounts. Not only with your financial institution want to see this, but you’ll also want to assure yourself that you can continue to make your mortgage payments in the instance that you lose your income.
This should give you a budget range. Once you sit down with your lender, they’ll be able to run some monthly cost scenarios based on the high and low end of your budget. This will lead to your pre-approval, and you’ll have a good understanding of what you would be comfortable with paying.