Being first time homebuyers, we had very little knowledge of the process and only a broad understanding of the home buying market in our area. Fortunately, my mom has a background selling real estate and we were able to work with a reputable, highly experienced relator she had personally worked with in the past.
One of the very first things we did was determine our budget. Our relator showed us homes that went up in price by 10k so we would get an idea of the pricing differences and what our budget would actually get us. I highly recommended asking your relator to do this for you if he or she doesn’t suggest it. It was so insightful and allowed us to understand that while we still wanted to keep our budget well below our means, a small price increase in the listing price might make little difference on our monthly payment and get us a nicer house. Additionally, our relator told us also that looking at homes 5-10k over our budget was totally acceptable as it gave room for negotiations (so long as we might be willing to let go of the house if need be).
Our initial budget was broad as we weren’t sure what condition the home we might purchase would be in. That being said, while we could afford our max, we really didn’t want to spend that much. The first for this reason was that our circumstances didn’t leave us more time to save for a sizable down payment [read: we didn’t want to be house poor due to PMI payments], and the second being that we simply didn’t feel that our first house needed to cost that much. The rule of thumb is for your home payments to be 1/4 your monthly income. But ours will be even less than that.Now, I know that might not seem to make sense. But with a major purchase like a home, you have to have a firm grip on what your values are as far as money goes.
Why wouldn’t we buy a nicer house if we could afford it/ could be approved for it? Simply put:
1. We wanted to reasonably pay it off in 10 or so years. We aren’t planning that this will be our forever house. Buying a lower priced house with low monthly payments allows us to pay it off at a reasonable rate and frees up cash for savings for the next house (we’d love to actually PAY cash for it!)
2. We wanted a fixer. My husband was fairly adamant about this. Not only would it allow us to afford a better house, but it would allow us to truly make it our own. We are both creative people who love projects and getting our hands dirty, so a fixer is a great fit for us. We needed leftover cash for renovations to make this happen. [more on how/why we decided to do this later!]
3. We wanted a house that fit our needs now & for the near future. As I said above, this won’t be our forever house, but the house we did buy will allow us to have several kids in it (if it so happens that way!). BUT, it’s not way too big for our needs now. We will be able to maintain it easily. Since it is a fixer, we can do nicer renovations for less because there is simply less square footage to price out.
4. We just didn’t need to spend more. Simply put. We will have more money in the long run to give charitably, take trips, reach saving goals, etc. Plus, our monthly payments are so low that if one of us loses our job, we can still easily make them. As mentioned, this is where your values come into play. We would rather have the financial freedom to travel or live on one income if needed, but you may value a turn key, forever home more (&/or be confident in job security). That’s okay, it just depends on your preferences.
Ultimately, your home budget is a personal, sensitive decision. The 4 criteria above reveal our values, but if you are planning to purchase a home it is worth putting together your own list before even looking. If you start the home search and find that your cannot meet your top values, it may be worth renting for a little while longer. I don’t regret the time we spend renting at all. Though we lost the money we put into rent, it allowed us to be in a better financial position for when we did buy a house. We saved money, learned what we liked/didn’t like, built credit for a better interest rate, and didn’t have to worry about home repairs during a busy season of our lives.
While these were our budget preferences, I will post our initial wish list and the revisions we made to it + how the house we ended up buying fit into the picture.