Budgeting to Buy

Smart Budgeting for Prospective Home Buyers

Budgeting to buy a home? There’s a lot to consider, including how much you can afford based on factors such as your annual income, savings accounts, and credit scores.

If you're budgeting to buy a home, congratulations - it's an important first step to take when searching for your new abode. Any home purchase certainly takes a lot of cash, and for the process to go smoothly, the more you have to put down, the better.

But why is it important to have a significant chunk of change to put into a down payment? The reasons are numerous. Closing on a home involves four separate payments:

  • Earnest money - This is essentially "good faith" money, paid by the buyer when the offer is made. It's attached to an offer to show the buyer you're serious. The amount can vary - your realtor may be able to advise you on specifics for each offer. When your offer closes successfully, the earnest money goes toward the down payment.
  • Down payment - This is the amount of money you'll pay up front at closing. The higher the down payment, the lower (and more affordable) your monthly mortgage payment will be.
  • Home inspection fee - Home inspections are optional and serve to educate you about your new home. A general home inspection is often inclusive enough to satisfy most buyers. However, additional inspections could be obtained for sewer lines, structural integrity, boundary lines, pools or other high-priced or hazardous risks associated with the home.
  • Additional closing costs - It's a good idea to put aside a portion of the total amount of your loan to cover additional closing costs. These costs may include lawyer fees, title insurance, real estate fees, appraisal fees, and others. Sellers may contribute funds toward closing costs as part of the sale agreement.

What You'll Pay Monthly

When estimating your monthly mortgage payments, take into consideration all of the costs that go into owning a home. Now that you have a good idea of the costs you'll need to budget for when conducting your home search, let's have a look at what goes into your monthly mortgage payment. Based on the type of home and terms of your mortgage, your monthly payments may include any or all of the following:

  • Mortgage principal - The amount of monthly repayment that goes toward your loan.
  • Mortgage interest - The fee for borrowing money from a financial institution.
  • Property taxes - These are paid to local governments to fund public services.
  • Homeowners insurance - A must for homeowners. These fees are paid to a private insurance company to insure your home against property damage.
  • Private mortgage insurance (PMI) - If you had a down payment of less than 20%, you'll need to also pay private mortgage insurance. This protects the lender from default.
  • Homeowners' association fees (HOA) - These apply to condos and other multi-family housing developments, and are put toward upkeep of common areas such as lawns, rooftop decks, etc.

The Importance of Credit

A mortgage is often the largest and longest-running debt a household has. To ensure you get the best interest rate, it's important to maintain the highest credit score possible.

Your Credit Report

Think of your credit report as your financial report card. It affects many areas of your life, including whether you can qualify for a home loan, car loan, and several other types of borrowed money. Creditors scrutinize these reports thoroughly, so having the highest score that's financially attainable for you is of the utmost important when budgeting for a home!

Questions about your credit report? Learn more about what's behind your credit score in Understanding Your Credit Report. Get your free reports through www.annualcreditreport.com or by calling 877-322-8228.

Building Better Credit

The higher your credit score, the more borrowing power you'll have. Your score provides mortgage lenders proof that you've been able to pay down your debt over a long period of time.

If your credit score is lower, you may be asked to put more money down or carry a higher interest rate. Taking time to improve your credit can save you money on monthly mortgage payments. Read more about building credit and tips on how to improve your credit score. Want to talk about budgeting for the home of your dreams? We're here to help.

Call us at 800-233-2328 or visit www.becuhomeloans.org