How to determine your budget if you are a first time home buyer that makes under 6 figures

Determining a budget as a first-time home buyer with an income under six figures requires careful financial planning and consideration of several factors. Here’s a step-by-step guide to help you determine your budget:

1. Assess your current financial situation: Start by evaluating your income, expenses, and existing debts. Calculate your monthly take-home pay after taxes and deductions. Consider your ongoing financial responsibilities such as student loans, credit card debt, car loans, and other monthly obligations.
2. Save for a down payment: Determine how much you can save for a down payment. It’s generally recommended to aim for a 20% down payment to avoid private mortgage insurance (PMI), but it may not always be feasible. Saving less than 20% may require you to pay for PMI, which adds to your monthly expenses.
3. Calculate your monthly housing costs: Consider all the costs associated with homeownership, including mortgage payments, property taxes, homeowners insurance, and potential maintenance costs. Use online mortgage calculators to estimate the monthly mortgage payment based on different home prices, interest rates, and down payment amounts.
4. Evaluate your debt-to-income ratio (DTI): Lenders typically use the DTI ratio to assess your ability to repay a mortgage. It’s calculated by dividing your total monthly debt payments (including the estimated mortgage payment) by your gross monthly income. A lower DTI ratio is generally more favorable, and most lenders prefer a ratio below 43%.
5. Consider additional expenses: Account for other homeownership costs such as utilities, maintenance, repairs, and potential homeowners association (HOA) fees. It’s important to have some financial cushion for unexpected expenses or emergencies.
6. Get pre-approved for a mortgage: Once you have a clear understanding of your financial situation, visit multiple lenders to get pre-approved for a mortgage. This process will help you understand the loan amount you qualify for based on your income, credit score, and other financial factors.
7. Set a realistic budget: Based on the pre-approval process and your financial assessment, set a realistic budget for your home purchase. Consider your comfort level with the estimated monthly payment, as well as your long-term financial goals. Remember to leave room for other financial goals such as saving for retirement or emergencies.
8. Research affordable neighborhoods: Explore different neighborhoods or areas that fit within your budget. Consider factors such as proximity to work, amenities, safety, and potential future growth or development. Keep in mind that home prices can vary significantly depending on location.
9. Consult with a real estate agent: Seek guidance from a reputable real estate agent who specializes in the local market. They can provide valuable insights and help you find homes within your budget.
10. Be prepared for negotiations: When making an offer on a home, be prepared to negotiate the price. This can help ensure you get the best deal possible within your budget.

Remember, buying a home is a long-term financial commitment. It’s important to carefully consider your financial capabilities, future goals, and the overall affordability of homeownership before making a decision.