Step 4: Make a budget you can live with

Finding a home is often a compromise between what we want and what we can afford. In Step 3, we discussed getting pre-approved to find out how much financing you can get. In this section, we’ll take a look at deciding how much you really feel comfortable spending. Hopefully by now you already know what your lender says you can afford. However, lenders use only formulas and profiles. You on the other hand, must work in the world of paying bills. To find out how much you can really afford, and feel comfortable affording, a good place to start is by establishing a budget, and sticking to it. That isn’t always easy, but it’s the best way to be in control of your finances and make sure your money is going toward the expenses that matter most to you.

Follow the steps below as you set up your own, personalized budget:


1. Make a list of your values.

Write down what matters to you and then put your values in order.

2. Set your goals.

  • Write down your goals.
  • Think about what you want to accomplish financially in the next three months, the next year, and the next three years.

3. Determine your income.

  • Figure your available income (the amount of your take-home, or net, pay).
  • Do not include overtime pay, because you shouldn’t rely on that as regular income.

4. Determine your expenses.

  • Review your checkbook register, credit card statements, store receipts, and more.  Where is your money really going?
  • “Fixed expenses,” such as a rent, auto, or student loan payments, are easy to determine.
  • “Flexible expenses,” such as food, clothing, and entertainment, vary from month to month.
  • Don’t forget about expenses, such as taxes or insurance, that are billed quarterly, semi-annually, or yearly.
  • Look into personal finance software programs that offer a budgeting feature to help you track these expenses.

5. Create your budget.

  • Think of your budget as a “spending plan,” a way to be aware of how much money you have, where it needs to go, and how much, if any, is left over.
  • Your budget should meet your “needs” first, then the “wants” that you can afford.
  • Your expenses should be less than or equal to your total income.
  • If your income is not enough to cover your expenses, adjust your budget (and your spending!) by deciding which expenses can be reduced.

6. Pay yourself first!

  • Saving is a very important part of protecting yourself financially.
  • Save as much as you can every month.  Even a small amount can make a big difference if you keep it up.
  • A great goal is to establish an emergency savings fund large enough to cover three to six months of your living expenses.
  • After you have an emergency fund, your savings can go toward meeting your goals.

8. Check back periodically.

  • Be sure to review your budget regularly.
  • Does the plan still meet your needs and help you achieve your goals? If not, make some adjustments or create a new budget that better meets your needs.

Ready to budget?

Input your monthly income and expenses into the fields below. (If a category doesn’t pertain to you, just leave it blank.) Then, when you’re done, click on the “calculate” button to total your numbers. A positive number indicates a budget surplus; a negative number indicates a budget deficit. Rework your numbers until you’re happy with the results.Create a Budget Using the Frugal Living Budget Calculator

Buying On A Budget

First, calculate your total monthly income and expenditures using the tool above and see how much is left over for a house payment.

Try to be candid. Put down what you are actually spending, not what you wish you were spending. Don’t make the mistake of thinking that your only housing expense will be your mortgage payment. Homeowners face costs that renters do not. Add this expense to your previous total.

If you are like most, the amount left over from your income will now see, terribly small. This number is probably much smaller than the lender says you can afford for a mortgage payment. If that’s the case, it is time to compromise. Ask yourself what you might be willing to give up to own your first home.

How Much Can You Afford To Put Down

The size of the mortgage you can get and, correspondingly, the amount you can pay for your home also depend heavily on the size of your down payment. The more you put down, the bigger the loan you are likely to qualify for. Most lenders prefer a down payment of 20%. However, there are options for homeowners who can’t afford to make that much of a down payment. Check with your lender about mortgage programs that allow for lower down payments, some as low as just 3% of the purchase price. One important thing to note, if your down payment is less than 20%, you may need to pay what’s called Mortgage Insurance each month until you reach 20% equity in the home.

What You Can Afford VS What The Lender Says You Can Afford

This difference between what a lender says you can afford and what you will feel comfortable with may be worlds apart. If you’re the sort of person who’s pretty good at budgeting and keeping track of your checkbook, chances are you’ll find the lender’s figure okay. If, on the other hand, your checkbook tends to be off each month and you never stick to a budget, then perhaps you’d best look for a lower payment.

What about my credit?

You should take a look at your credit report before you start the home buying process. This is the time to clean up any past issues and make sure there are no inaccuracies or mistakes. To qualify for a mortgage, you’ll need to meet the lender’s credit qualifications (which may vary by lender but you typically need a minimum credit score of 620). If you’re not in that range, you may need to spend time rebuilding your credit or come up with a larger down payment (i.e., 10% vs. 3%).

Find more information about how important your credit is, how to repair credit issues and how to understand your credit score, by clicking here.

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