How much house can you afford? First-time homebuyers need a budget
Alexandra Lashner of Bensalem, Pennsylvania, became frustrated after attempting to buy a house this year and decided to postpone homeownership.
Source: Alexandra Lashner
Alexandra Lashner and her husband were excited to buy their first home earlier this year.
They saved up enough for a 20% down payment and had no debt. Yet they still couldn’t find a house, even after bumping their budget up to $300,000 from $250,000.
“A lot of homes have become out of reach,” said Lashner, who is 27 and lives in Bensalem, Pennsylvania.
“Homes we were once able to afford a year or two ago are now completely out of the question.”
The tight supply of homes on the market has pushed prices higher. In August, the median price of an existing home was $356,700, a 14.9% increase from August 2020, according to the National Association of Realtors.
That’s left many first-time homebuyers on the sidelines. In August, they were responsible for just 29% of all sales. Historically, they make up 40% of all buyers.
In order to get into a home, some buyers are blowing their budget. In 2021, 28% purchased homes above their initial estimate, according to Zillow.
Yet creating a budget is very important before you decide to buy a home. Here’s what you need to know.
Your down payment
Figure out your monthly payments
Just because you get approved for a certain mortgage amount doesn’t mean you should spend that much.
First, look at your monthly expenses, such as car loans, phones and daycare. Then, figure out what you can afford to spend each month on a mortgage payment, and make a decision from there, said financial advisor Jacqueline Cooper, founder, president and CEO of Financial Education Associates in Dorchester, Massachusetts.
Homes we were once able to afford a year or two ago are now completely out of the question.
Alexandra Lashner
Potential homebuyer
Remember, you’ll also be paying property taxes to your local government, which is based on the assessed value of your property and your town’s tax rate. On top of that, you’ll have to pay homeowners insurance, which costs typical homeowners slightly less than $1,000 a year.
You can also look to make cuts in other areas of your budget in order to afford a higher payment, as well as looking into locations that may be less expensive. As people are deciding not to return to the office five days a week, they are moving farther away, said Jessica Lautz, vice president of demographics and behavioral insights at the National Association of Realtors.
“Younger buyers are moving to small towns and suburban areas,” she said.
Account for other expenses
JGI/Tom Grill | Tetra images | Getty Images
Have at least a few months of mortgage payments saved before you buy a home, Cooper suggests. This way you are protected if you have any disruption in income.
Also, have some money in reserves for the unexpected.
“Something may break once you are in the home or you may want to decorate it or change the finishes within the home,” Lautz said.
There are also regular costs to…
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