Buying your first home is an exciting milestone, and it’s often one of the biggest financial decisions you’ll ever make. Everyone deserves a place to call home—a comfortable space to return to after a long day of work. At Avanti Way Financial, we’re here to help guide you through the budgeting process, especially if you’re a first-time homebuyer. The road to homeownership starts with smart planning, and we’ve broken down some easy steps to help you budget effectively and confidently for your new mortgage.
Step 1: Calculate Your Annual Income
Start by calculating your total annual income, which includes your salary, bonuses, side gigs, freelance work, and any other sources of income. If your income fluctuates throughout the year, use the average of your earnings from the past 12 months. Be sure to track all forms of compensation, especially if you’re self-employed or working on a contract basis.
Step 2: Add Up Your Annual Expenses
Next, it’s time to get a clear picture of your annual expenses. The more detailed you are, the better. Begin by listing your fixed expenses—things like rent, utilities, car payments, and phone bills. Afterward, move on to variable expenses, such as groceries, transportation costs, dining out, and entertainment. This exercise is not only helpful for budgeting but can also help you identify areas where you may be overspending. For example, you might find a streaming service you no longer use that’s draining your budget, which you could eliminate to free up funds.
Step 3: Set Financial Goals for Your Down Payment and More
While general budgeting is important, when you’re specifically saving for a home, it’s essential to set clear financial goals. One of the biggest challenges of homeownership is saving for the down payment. The good news is that there are several down payment assistance programs available, including options that are specific to certain states or cities. Additionally, VA and USDA loans can offer 100% financing for eligible buyers, so be sure to research these options.
Beyond the down payment, you’ll also need to plan for closing costs, moving expenses, and any other fees outlined in your final closing disclosure. Having a goal for these costs will ensure that you’re financially prepared when it’s time to close on your home.
Step 4: Get Preapproved for a Mortgage
Getting preapproved for a mortgage is one of the most crucial steps in the homebuying process. Before falling in love with a property, it’s important to know exactly how much you can afford. A preapproval letter from a lender not only sets clear boundaries for your house hunt but also helps you understand how much money you’ll need to save for your down payment and closing costs. With this in hand, you’ll be able to confidently search for homes within your price range.
Step 5: Build an Emergency Fund
Once you’ve started your home-buying journey, it’s vital to establish an emergency fund. As any homeowner will tell you, unexpected expenses are bound to pop up—whether it’s a furnace that suddenly breaks down or a tree that falls on your roof during a storm. Setting aside money for emergencies will give you peace of mind knowing you’re prepared for the unexpected. Aim for a fund that covers at least 3 to 6 months of living expenses, if possible.
Step 6: Implement and Track Your Spending
Now that you’ve calculated your income, expenses, and savings goals, it’s time to put your budget into action! Organize your fixed and variable expenses so you can track how your income aligns with your spending. One popular budgeting method is the 50/30/20 rule:
- 50% for needs (e.g., housing, utilities, groceries)
- 30% for wants (e.g., dining out, entertainment)
- 20% for savings
You can adjust this method based on your individual circumstances. For example, if you want to buy your home sooner, consider increasing the percentage you allocate for savings and cutting back on non-essential expenses.
Another helpful guideline is the 28% Rule, which suggests that your mortgage payment should not exceed 28% of your gross monthly income. FHA loans are a bit more lenient, allowing up to 31% of your income for housing costs. This is a useful tool to ensure that your mortgage payments remain affordable, but also consider any other debts you may have (e.g., student loans) and how they fit into your overall financial picture.
Are You Ready?
By now, you should have a solid understanding of how to effectively budget for your first home. The key is to be realistic about what you can afford and take a thoughtful, measured approach to homeownership. Don’t let the excitement of homeownership cloud your judgment—make sure you’re financially prepared before taking on a mortgage.
At Avanti Way Financial, we offer complimentary consultations to help you navigate the home-buying process. Whether you need advice on budgeting, mortgages, or down payment assistance, we’re here to help you achieve your homeownership dreams. Let’s work together to make sure you’re ready for this important step in your life!
