Understanding What You Can Afford
Before you start looking at properties, determine your budget
Most home searches begin with buyers looking through home magazines or advertising. The decision to make a move may already be made (for example: a job relocation, a new addition to the family, purchasing a vacation home), or more often, the buyer is curious about other homes that more closely match their evolving needs.
Once that decision is made, however, a serious home search should not be undertaken without understanding all the costs of a move. Buyers who skip this step can waste their time, or worse, contract to buy a home they cannot afford!
Home Ownership Expenses
New homebuyers are often surprised at the expenses associated with owning a home. In addition to having complete responsibility for routine maintenance and periodic repairs or replacement, there are monthly and annual costs that may apply, depending on the property.
These expenses include:
- Mortgage repayment of principal and interest
- Private mortgage insurance (for loans of more than 80% of the home’s value)
- Homeowners’ or Condo Association fees (if applicable)
- Property taxes
- Hazard and windstorm insurance (sometimes included in a Condo Association fee)
- Flood insurance, mandatory in a designated flood hazard area, otherwise optional but not a bad idea in South Florida
These last three items are either paid annually, or paid monthly through the mortgage company escrow account.
Setting a Budget
You can approach budgeting in one of two ways:
- determine the maximum amount you can afford to spend each month on the above items, and then work backward to arrive at a mortgage amount and home price, or
- work out what the payments would be for a particular price range and property type, and then decide if you need to scale back.
To arrive at accurate figures you should consult with your lender, your insurance agent, local taxing authorities, and your real estate professional.
Price Range
Your price range should realistically be based on what you are comfortable with. Often this will be less than what your lender tells you you can borrow on, and if that’s the case, great - you have some wiggle room in case you can’t find what you really like in your price range.
In a few cases, however, you may not be able to borrow as much as you feel you can afford. Ask your lender to explain how they arrived at their figures… if you have constraints, they should be able to explain what affected your loan amount. You may need to scale back your needs, and your price range. However, in most cases, renters can benefit from buying a condominium or townhome, or a smaller home, providing it meets their needs.
Work with your real estate professional, once you’ve arrived at a price range and priorities, to find the home that’s best suited for you.