Home, Sweet Home

A cosy home surrounded by a white picket fence is the quintessential American dream for many. Receiving the keys to your first house is not only a gratifying experience, but also a financial milestone.

As your family grows, you may look to upgrade to a bigger place. So how can you be sure you’re moving into a home that best fits your budget?

Whether you rent or own, the financial planning community has long advised that about 30 percent of your monthly budget should go toward housing. However, this model is outdated and unrealistic in today’s marketplace, particularly for young adults.

Housing & Other Costs
A survey by the National Endowment for Financial Education (NEFE) found that on average, millennial-age parents are spending 40 percent of their income on housing. More shocking, one in five is paying 50 to 59 percent and one in ten is paying more than 75 percent.

That’s just housing. When you tack on childcare expenses, student loan debt, groceries, utilities, transportation and healthcare, you quickly discover that the math doesn’t add up. All the while you’re being told you need to save for retirement!

Understand How You’re Being Qualified for a Mortgage
Qualifying for a mortgage can be exasperating, as realtors and mortgage lenders may urge you toward a higher overall loan amount. Don’t be upsold on a mortgage destined to be a budget buster. You know your budget and what you reasonably can afford. It’s up to you to advocate for you and your family.

Calculate all costs associated with buying a home: property taxes, homeowner association fees, insurance, utilities, maintenance and repairs, and closing a loan.

Along with evaluating your credit score, most lenders will use a variation of the “28/36 Rule.” This means that PITI (principal, interest, taxes and insurance) cannot exceed 28 percent of a borrower’s gross monthly income. Further, PITI, plus all outstanding consumer debt (such as car loans and credit card payments), cannot exceed 36 percent of gross income.

But your budget also includes groceries, gas, other insurance and, possibly, childcare — typically not counted against your financial obligations from a lender’s point of view. You can increase the likelihood of approval on your mortgage if you increase your down payment.

Get Comparisons
For every required service — whether from a realtor, mortgage lender, home inspector, property insurance company or attorney — compare at least three competing firms. But remember: Multiple applications through mortgage lenders and insurance companies may ding your credit score, so exercise caution. Also seek referrals from friends, family and coworkers who already have gone through the home-buying process. Use the Internet to shop around and compare services efficiently.

Don’t Forget Insurance
Purchase liability limits of at least $300,000 ($500,000 is preferred) on homeowners’ insurance, and secure adequate coverage to rebuild your home in the event of a loss. A property and casualty insurance agent can assist you with these decisions.

Making Sensible Improvements
Your first house likely won’t be your last. Updating can help build equity, but make improvements that provide reasonable return. Some renovations, such as adding a bathroom, landscaping or remodeling a kitchen, may significantly increase appraisal values. Beware, however, of over-improving your house. A general rule is that you cannot expect a house to sell for more than 20 percent above the neighborhood average.

Anticipate Future Expenses
If you plan on having another child, you may have increased childcare costs. It’s not uncommon for families to pay childcare expenses that are close to their mortgage or rent payment. Long-term expenses like these should be considered before buying your first home. Also remember: Unforeseen expenses are not if they will happen but when. Prepare yourself for when you need to replace a roof, furnace or major household appliance by creating an emergency fund.

If you’re stuck in a home where you’re spending at — or near — the entire amount of your monthly income, it’s time to get more aggressive. The solution may be downsizing. This makes sense whether you rent or own. You may want a three-bedroom apartment but, financially, you may have to settle for something less. If you own a home, now may be the time to refinance while rates still are historically down. If all else fails, a spending plan can help you estimate expenses and plug spending leaks.

For more financial information, visit www.smartaboutmoney.org.