These insights help you navigate the financial stress in your house hunting journey.
Quick takeaways
Buying a home can be exciting—and overwhelming. Especially if you’re tackling it for the first time or the housing market is super competitive, feelings of doubt can be quick to creep in. Have you done all the prep work? Does your choice suit your budget today and your long-term financial goals?
The housing market is also a factor, with cycles of higher housing and borrowing costs that can make it harder to meet and stay on budget. And overspending or stretching your budget too thin may impact other savings goals you have, such as retirement.
The best way to stamp out doubt and stay on strong financial footing is to gain a clear understanding of the money-related essentials and market impact when purchasing a home. Here’s what to consider.
Reducing overall debt and boosting a credit score take time but help you get a loan with a better interest rate.
A careful review of your current and future spending can help you determine what home you can afford. Start with the industry recommendations: Total debt payments, including a future mortgage, should be less than 36% of your pre-tax income. Total monthly housing costs should be less than 28% of your pre-tax income.
| Household income | Total monthly debt payments (36%) | Total recommended mortgage payment (28%) |
|---|---|---|
| $75,000 | $2,250 | $1,750 |
| $100,000 | $3,000 | $2,333 |
| $150,000 | $4,500 | $3,500 |
These critical pieces help lower your mortgage and enable you to deal with unexpected expenses.
If you’ve been renting and your dishwasher breaks, it’s the landlord’s responsibility. Once you own a home, it’s yours. Unexpected expenses—in the home and elsewhere—can quickly upend a budget, so having a cushion is important.
When it comes to mortgages, all sorts of financial institutions, from mortgage brokers to banks and credit unions, offer mortgages. Review and finalize your financing as you get closer to looking for and making an offer on a home.
Then, gather everything you need ahead of time to avoid a last-minute scramble. A list to get you started:
- two most recent state and federal income tax returns
- two months of pay stubs (for job and income verification)
If you’re self-employed, a freelancer, or independent contractor:
- a year-to-date profit and loss statement
- two years of records, including the form 1099s to report income and file taxes
There are two types of expenses to think about when you’re house hunting: one-time expenses and ongoing expenses.
One-time expenses can quickly add up. If you’ve been a renter, chances are you don’t have some of the necessary tools that you need, like a lawnmower. If you’re moving from a small home to a big home, you may need more furniture. There may also be one-time costs associated with a home purchase, such as an inspection.
Some ongoing expenses such as homeowners' insurance may be obvious. Others, not so much. For example, will your utility costs take a big jump if your next home is significantly larger?
Research the local and state property taxes so you understand the impact those will have on your budget. And think about protection from the unknown, too. For example, disability and life insurance can help your family pay for your mortgage if you become injured or too sick to work, or if you were to die.
Carefully review the deed and title on any purchase to ensure ownership is clearly outlined.
And then there are your emotions; try to separate them from negotiations. It’s a financial transaction, and one that you want to ensure is the best choice for you, your family, and your future goals.
A financial professional can help you plan ahead and ask the right questions as you take on new chapters in life. If you don’t already have a financial professional,
