Monthly Housing Budget
A monthly housing budget is the amount of money you need to live comfortably in and finance your home after your other normal financial obligations have been met. In the past, a borrower looking for a mortgage was expected to have a less than 28% for housing expenses ratio by lenders. A good percentage ratio shows that the borrower can pay their mortgage with ease.
This ratio takes into consideration your gross income, living expenses, fixed monthly financial obligations, and housing expenses. These expenses should be well below 36% of your gross income for a mortgage company to lend you a mortgage loan.
Relaxed Lending Rules
Times, however, have changed, relaxing lending rules and most people now get mortgages approved that they cannot afford to finance. This has led to a lot of financial duress both for lenders and borrowers, with large amounts of defaults and near bankruptcy cases for lenders.
Following the recent recession, more and more lenders are coming back to conservative lending processes that take into consideration your monthly housing budget before lending.
Why Should you Analyze your Housing Budget?
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It is human nature to get wowed by items you cannot afford. For this reason, most people desire to buy more house than their pockets can handle. It is normal to want to stretch yourself, perhaps because society’s ideals keep pushing people towards consumer spending.
It seems that every message out there is about purchasing better or bigger items than you initially knew you wanted. This leads to overspending which leads to a lot of stress, conflict and adverse effects on families and marriage relationships. All these are avoidable problems if a budget is made and adhered to.
A survey done by StreetEasy in New York shows that millennials are hardest hit by overspending especially on purchased or rented homes. The report says that over 45% of millennials more than any other generation will spend more than what was their initial housing budget compared to 19% of boomers and 30% of Gen Xers.
A report by Parents magazine and the National Endowment for Financial Education also says that one in five parents from the millennial generation spends at least 50% to 59% of their income on housing expenses. The statistics get more even grimmer for 8% of all millennial parents who spend over 60% to 74% of their household income on housing.
How to Determine your Monthly Housing Budget
A healthy housing expense ratio as mentioned earlier has lows of 28% to 30% and should not exceed 40% in the most expensive of localities.
To come up with a healthy monthly housing budget, you should use your current financial data. The amount that remains when your monthly expenses have been subtracted from your net income for your household should cover mortgage payments comfortably.
This is your monthly housing budget, and it includes all mortgage payments, interest on loans like short term borrowed from website like https://www.realisticloans.com , taxes, condominium fees and heating costs too. This figure might not entirely eliminate the possibility of home foreclosures, but it will help you enjoy home ownership. If with time you feel at ease with your monthly home budget spend, then you can add to it, and pay off the mortgage faster. If it might strain you financially, let it be till your finances can afford an increase in the budget.
The Monthly Housing Budget Determination Process
Set a Budget
Created by Elizabeth Warren, a Harvard expert on bankruptcy and Massachusetts senator, the 50/30/20 budgeting rule has become the to go budgeting concept of the decade. Its premise is pretty simple;
Step 1: Know your Income After Tax Deductions
This is basically the amount you have left when all taxes, income, local, state, social security, and Medicare have been spoken for. For employees, all these taxes are shown at the bottom of your pay stub. For business people who are in self-employment, your after-tax amount is calculated by subtracting your business expenses from your gross income.
Step 2: All your Needs Should be Catered to by 50% of your Income After Taxation
Now list down how much you spend on needs each month. These costs include health insurance payments, groceries, utilities, housing, and car insurance and payments. Ensure that you trim these costs until they only consume 50% of your earnings after tax.
It is imperative therefore to differentiate between wants and needs. If you can forgo payment and only minor experience inconveniences, that is a want. Such expenses include cable or Netflix payments. Other costs that you need to pay for to live comfortably include utility bills or health insurance are needs. A late credit card payment can be a need too because not paying it will mess up your credit score and make it harder for you to access credit in the future.
Step 3: Limit the Payments of Wants to 30% of your Net Income
While this may put a smile on your face, it will surprise you that wants are not extravagances. It is not that coveted trip to the Caribbean or that expensive Nike Air Mag pair you have been dreaming of. Wants here refer to basic niceties like cosmetic repairs for your car, or that cable or Netflix payment.
Step 4: 20% of your Net Income Should be Spent on Debt Repayment and Savings
Build an emergency fund and retirement nest egg. Payback debts owed and if you can make any extra payments on your car or mortgage loan, do it.
Understand the Market
With a reasonable budget in place, visit your agent or search your local housing listings to figure out the possibilities available for your finances. This will help direct you to affordable areas or houses that fit within your budget.
Keep in Mind that there Will be Other Costs
Other costs of renting or mortgages may include brokerage fees, lease signing costs, advance payment of the first and last month of renting, or security deposits. Dig out as much information as you can during your house search stage to prevent any last-minute four-figure financial surprises
Be Sure About How Far Back You are Willing to Bend
Ensure that you know what your trade-offs are. What features can you not live without? Which ones can you sacrifice? Housemates, for example, can save you a lot of cash just as living in outlying neighborhoods can but it all boils down to personal choice.
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Have long term concrete goals to keep you in check as far as financial decisions are concerned. A five-year plan, for example, will allow you enough time to save if you are planning to purchase a home.
Can you Afford it?
Just because you can afford something does not imply you should purchase it. A home purchase should ideally be made if it will bring you comfort, security, and joy. If it is going to be a source of worry and stress, then it is a poorly thought out purchase decision.
The Financial Planning Association has a set of questions that will guide you to the right home purchase or the right rental too.
1. How Good is your Credit Score? If it is Low you Need to Improve it By;
- Paying all your bills all the time and on time,
- Using credit facilities to build a healthy payment history
- Avoiding new unnecessary credit
- Paying down high debt to prevent hitting your credit limit
2. How is your Work History?
Creditors and landlords will need employment gaps explained. Steady employment for at least two years makes you less of credit risk.
Ensure that your housing expenses ratio is healthy. If you have a problem when answering these questions, take some time to purchase or rent a home.