Calculating your New Home Budget

When selecting and building your new dream home, you will need to ask yourself a lot of questions and one of the biggest will be "How much home and property can I afford?" Unfortunately, the answer for many people is "Not as much as I thought." Unless, that is, you plan ahead and are willing to trim expenses in order to achieve your goal of new home ownership.

Generally, your bank or lending institution will likely be willing to extend you a loan equal to twice your annual income. Remember, the more money they loan you, the more they make in interest payments. You certainly aren't obligated to take the full amount your bank is willing to lend. But how will you determine the amount you need without going over budget? You create a comprehensive budget analysis. Your lender will be able calculate the size of your home loan based on your monthly credits and debits; i.e., your income and expenses. Next, the lender will subtract the expenses you presently incur or that you may owe as a homeowner. Common expenses include estimated property taxes, homeowners and mortgage insurance, condo or homeowners' association fees, car payments, average credit card debt, student loan payments and alimony and/or child support payments. Your mortgage payment is then calculated on the amount that's left over. As you can see, the expenses list isn't extensive. Your lender will likely ask you to come up with a dollar figure for "other monthly expenses." However, unless you're extremely cognizant of your spending habits, you'll likely underestimate that amount. That's why it's important to consider every aspect of your daily and monthly spending, so that you're not stuck having to make major lifestyle adjustments after you assume your new home mortgage.

Use a worksheet to calculate your monthly expenses. Some of the expenses you list will be the same in your new home as in your current living situation. Other expenses, such as utility payments, taxes and insurance, will probably change. If you currently rent an apartment, they'll change drastically. Ideally, the best way to get an accurate assessment of your monthly expenses is to track them. You can purchase an ordinary accountant's ledger at most discount stores. Use it to keep track of every single dime you spend for one month. It's not as hard as it sounds; it just takes a little discipline. Formulating a budget can help insure that you'll have money left over to make your new house a home.