You’ve done all your research. You know where you’d like to live and what type of home you want. You’ve even been to the bank already to talk about financing, you’re pre-approved for a mortgage and you know exactly how much you can spend on a new home.

But do you know what you can actually afford? Buying a home is one of the biggest purchases you’ll ever make, and first-time buyers often fall into a trap of thinking that their mortgage is the only expense they need to consider when they’re trying to decide if a home is affordable.

You really need to run a few numbers through your mind before you buy your first home. In other words: You need a budget.

Here’s how to get started:

Calculate Exactly What You Can Pay for Housing Costs

When was the last time you sat down and looked at your income and expenses? If you’re like most people, payday equals “exchange day.” You pay your bills as soon as your paycheck comes in and whatever is left, you can keep or use for your personal wants and needs.

When you own a home, it’s a little different. You have to know exactly what you have coming in and going out — and what you can afford to tuck away for that next major home repair or extra maintenance costs.

According to the Federal Housing Administration (FHA), your monthly mortgage and property taxes should be under 31% of your pre-tax monthly income, so start by writing down all of your income sources. For good measure, you should also make a list of the monthly expenses you’ll carry forward to your new place, like your car note, insurance payments, cellular phone bill and credit cards. (Don’t include the expenses that are likely to change, such as your utilities. We’ll talk about those later.)

This step helps you visualize what you genuinely have to spend each month, and seeing it on paper can help you make better decisions about what home to buy. For example, imagine that you make $102,000 per year, or $8,500 a month in gross income. Using the FHA formula, you can afford $31,620 per year on a mortgage — or $2,635 per month.

Give Yourself a Hard Reality Check

Now you know that the FHA, the leading governmental authority on what’s acceptable when it comes to housing costs, says you can spend on your mortgage and taxes…but is that really wise?

Probably not.

There are a lot more expenses going into a home each month than just your mortgage and property tax payments and that $8,500 per year is your gross income, not your net. Your net (post-tax) income is probably more like $6,000 per month by the time you pay taxes, health insurance costs, ERISA payments and make pension contributions.

Once you do the math (again), you’ll see that 31% of your net income is only $1860 per month, which is significantly less than the bank may say you can afford on a mortgage — and we’re not done.

Now, you need to consider all of the additional monthly costs that go into a home and roll that into what you’re paying. Consider the following (some of which you may already be used to paying, and some of which may come as a surprise):

  • Utility bills: You need to remember that heating and cooling costs can vary by location, so do some research into the average bills in the neighborhoods you’re considering.
  • HOA fees: Looking into a planned community? Your HOA fees will be an additional monthly expense that you have to add into your calculations.
  • Maintenance and repairs: Once you own a home, all the upkeep is yours to manage. The experts say that you should anticipate saving 1% of your home’s purchase price for ongoing repairs — but an older home may cost you more. So could any major renovations that you want to make, so take those into account, too.
  • Emergency funds: Regular maintenance isn’t the same as an emergency repair, and Murphy’s Law dictates that your water heater will die on the coldest day of the year, your furnace will develop problems in November and your A/C will cut out in July.

Once you consider the sum total of your estimated home costs and can compare them to your income and bills, you may be comfortable spending significantly less than $1860 per month on your mortgage and property taxes.

Pick a Home That Works with Your Budget

Once you have some figures in mind and have decided what you can actually afford (as opposed to what the bank says they’ll lend you), you have to think carefully about your additional wants and needs. You also have to consider how those wants and needs intersect with your home-buying goals.

Here are a few things to contemplate before you settle on a home:

  • Size: The bigger the home, the higher the heating costs. You’ll also pay more for landscaping bills, renovations, furnishings and decorations simply because the scope of every project is going to be bigger. Smaller houses are definitely cheaper to furnish and maintain.
  • Age: An old home may have charm, but you won’t find it very charming when big-ticket items start to wear out and need to be replaced one after the other.
  • Condition: That quaint fixer-upper has a bargain price — but it comes with a huge list of repairs. Be realistic with yourself about what it will cost to renovate (and how much time, energy and skill you have to handle the job yourself).

There, that’s it! Those are the major things you have to think about when budgeting for your first home. While it seems complicated now, it gets easier as you go along — and working with an experienced real estate agent can help you better understand the true cost of each home you consider.

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