Whether you plan on building, remodeling or purchasing an existing home, sticking to a budget can become difficult if you do not have a plan in place. The excitement of buying a house, especially your forever home, can sometimes cloud your financial goals.
Which Questions to Ask?
A typical question that people ask is “How much will it cost to build the house I want?” Unfortunately, this is the wrong question. To save yourself the heartache of building a house outside of your budget; the question you should be asking is “How much house can I afford?” or even more specifically “How much do I want to spend each month?”
Debt to Income Ratio
The 28/36 Rule is a general calculation; created by financial experts,to help assess the amount of debt an individual or household can take on. This guideline states that you should spend no more than 28% of gross monthly income on your total housing expenses; and a maximum of 36% on total debt, including car loans, student loans, credit card debt, insurance and medical bills. This rule is also used to assess your income to debt ratio when your loan is in underwriting; and will help lenders determine if you can afford the mortgage loan you are applying for.
Keep in mind that the 28/36 Rule is a recommended calculation. It is important to take into consideration your personal goals. How much do you need to save monthly for retirement,? How about investing in your children’s education or paying off student loans? Not only should you outline your personal financial goals when creating your budget; but remember that unexpected expenses happen too, such as unexpected medical expenses or the loss of a job. Staying firm on your financial budget not only helps you to feel good about the home building process; but owning your home won’t break the bank either.
Discuss your budget with a Certified Financial Planner before you meet with a builder or an architect; so you have well defined financial goals and priorities.