Determine How Much You Can Afford
When you decide to buy a home, you're definitely going to need two things: a down payment and the ability to make monthly payments. Do you know how much money you can afford to spend on a new house? To figure this out, you'll need to take a good hard look at your current financial situation.
If you've never worked out a formal household budget, now is the time to start. This is the only true way to know how much you have coming in, how much is going out, and what's left over each month. Making a budget is a good opportunity to improve the management of your money and cut down on debt.
- Collect information on how much you spend - Two good resources for tracking expenses are your checkbook register and credit card statement. For a complete picture, also save all receipts for two or three months when you pay cash.
- Categories - Once you know how much money you spend and where it goes, you are ready to group your expenses into categories. Use our Budgeting Worksheet to decide what categories apply to you.
- Income - Determine what you can realistically expect to earn on a monthly basis. If your income varies from month to month, as a sales person's might, look over last year's income and figure out a monthly average. Try to be conservative when projecting, and be careful about including overtime, bonuses, and commissions that may not happen.
- Project your expenses - Using our Budgeting Worksheet, determine how much money should go into each category to meet expenses. For those expenditures that only occur once or twice a year, like auto insurance, figure out how much money you need to hold back each month so you'll have enough when those bills arrive. Don't forget to anticipate future expenses such as auto repairs.
- Balance your budget - If you think you have a pretty good idea of what's going out and what's coming in, now comes the moment of truth. Use our Current Spending Analysis Worksheet to find out whether you make more than you spend or spend more than you make. If your income is greater than your expenses, fantastic! Now is the time to set up a regular savings plan. If your expenses are greater, don't panic, your situation can be improved by adjusting some spending habits.
- Fine tuning - One of the biggest benefits of the budget process is finding out where you're spending your money. Realize that your newly created budget will have to be adjusted - maybe spending a little less here and there for the first few months until you get things where you want them. Even then, you'll want to review your budget periodically to make necessary adjustments.
Once you’ve determined your budget, you’ll want to determine how much money to spend on a new house. To help answer this question and simplify your home buying experience, 1st Source Bank offers several simple and easy to use calculators to help provide answers to the following questions:
- What will my payments be for a fixed rate loan?
- What will my payments be for an adjustable rate loan?
- What will my payments be for a balloon loan?
- Should I rent or buy?
- Which is better for me, fixed rate or adjustable?
- What will I save if I make extra payments?
- How much house can I afford?