If you’re thinking about buying your first home you may already be familiar with what it takes to be a homeowner. Paying the bills, cooking, cleaning, and doing the shopping. You might have a lot of practice at these kind of responsibilities but unless you planned for all the little details you may wind up unpleasantly surprised after you’ve entered homeownership. The best way to prepare is to do your research and put it into practice.
The first thing you need to do is find out just what it will cost to be a home owner. You might think you already have a good idea, but up to 71% of millennial homeowners say their biggest regret is not realizing how much being a homeowner would cost. Once you’ve figured out how much money it’ll cost you to own a home each month you’ll need to practice “spending” that money each month. You’ll put together a balance sheet of all your income and expenses as if you already own your own home. If it’ll cost you a lot more to do that compared to what it costs to live where you are now just put the extra amount away as though you’ve “spent” it. For example, if it costs you $3,000 to live each month but owning a home would cost you $4,000 then you’ll put the extra $1,000 away each month. (This can be a helpful way to build your down payment or emergency savings.) Doing this will give you a good idea of what it feels like to spend this kind of money on a home every month.
Begin with income. Make your calculations to the penny. How much money do you bring home every month after taxes and all other deductions? You can’t spend more than this each month. (Well, technically you can if you use credit products but it’s a really bad idea.) Whether you’re salaried, work for commission, plan on managing the finances alone or with a partner, find out exactly how much money you can expect to take home each month (to the best of your ability.)
Be real with yourself. Don’t fudge the numbers to make yourself feel better about your ability to afford a home. Overestimating your income will only lead to disappointment, either when you apply for a mortgage and get denied or after you move in and realize it’s more than you can handle.
Expenses. It might make you a little sad to see so much of your hard earned dinero leave your bank account so soon after it went in, but knowing just what you can expect to spend will leave you far better prepared. You’ll need to find out what each and every expense will be. The following list isn’t exhaustive but it’s a good place to start. If there are other expenses not listed that you know you’ll have to be responsible for, make sure you include them. Whatever the expenses are, make sure to account for every dollar.
-utilities (gas, water, sewer, garbage removal)
-consumer debt (credit card, car payment, student loan, line of credit, etc.)
-other home expenses (maintenance, emergencies, repairs, furnishings, etc.)
-consumer expenses (internet, netflix, gas, phone, life/health/car insurances, groceries, savings, and all other spending)
If you want to get a good indication how much it’ll cost to have a mortgage your best bet is to get a pre-approval. This application will tell you how much mortgage a lender is likely to approve you for. You don’t have to use the full amount but it’ll help you to start putting a budget together. A pre-approval doesn’t take into account other existing debt or expenses, so just because the lender said they’ll give you the money doesn’t mean you can afford to take it. Don’t spend more money than you have.
Home insurance, HOA fees, property taxes and utilities
Many life expenses you’re already paying for won’t change much (if at all) once you’re living in your own home. Things like groceries, internet and cell phone bills will stay the same. If you’re already paying for utilities where you live then you’ll keep paying these same bills as a homeowner, but chances are you’ll be paying more. Living in a 3 bedroom starter home costs considerably more than a 1 or 2 bedroom apartment.
In order to find out how many bills will be coming your way after you’re a homeowner you should start by talking to people you know who own a home similar in size and detail to you want to buy. Then you can start checking out some open houses for houses similar to what you’d like to buy. Ask the seller how much they’ve spent on home and property related expenses in the last 12 months.
If you already have existing debt do you know how much it is? Do you know, down to the dollar, how much you owe, how much you repay each month, and how much interest you accrue? If you don’t you’d better find out. This kind of debt includes credit cards, student loans, car payments, lines of credit and other loans. If you can lower your debt-to-income ratio by paying off as much debt as possible you’ll be able to get approved for a more favourable mortgage. And you’ll be able to afford more.
Other home expenses
As a homeowner you’ll also be on the hook for expenses like repairs, renovations, maintenance and emergencies. You won’t have a landlord to take care of it. You’ll also have to consider whether or not you’ll need to buy furniture. If you’re bringing furniture with you you may also end up needing or wanting more, bigger, or new furniture, especially if you’re upsizing. Home experts say that the average homeowner spends 1% of the price of their home every year on maintenance. For example, if you bought your home for $350,000 you can reasonably expect to spend $3,500 every year on upkeep. You may spend more or less than this in any given year but it will balance out. If you spend less than planned make sure you put the extra away for future years. Having cash on hand for expensive repairs like a burst pipe or a dead furnace will help.
Unless you’ve got an iron grip on your budget chances are you don’t track every dollar you spend. You might have a general idea how much money goes out of your bank account and where it goes, but if you’re going to practice spending like a homeowner now is the time to track every cent. Spend 3 or 4 months tracking your spending and put your collected information into your balance sheet.
Put it together
Once you’ve laid out all your income and expenses you’ll have a good idea where you stand and if you’re in a position to take on the additional expenses that come with homeownership. If you’re already spending more than you make each month you’ll have to make some changes before you can consider buying a home. If you’re already living within your budget but homeownership is more than you can afford you can try to move things around a bit to try and make it work. Ask for a raise, opt for a cheaper cellphone plan, cancel your cable subscription, (who watches cable anymore anyway?), spend less money on the weekends out with friends, trade in your vehicle for one with a smaller payment, sell extra “toys” you pay for every month, downsize the type of home you want to buy. If being a homeowner is the goal then find a way to make it work.
Time to practice
Once you’ve got a workable plan in place it’s time to put it into practice. It might look like it’ll work on paper but you’ll never know for sure until you try it. If the balance sheet says it’ll cost you $4,000 a month to own a home but your current circumstances only cost you $3,000 just put that extra grand away each month (and DO NOT spend it!) to simulate the experience of spending $4,000 every month.
Try this for 3-6 months, or even a year, whatever works for you. Just make sure it’s long enough to give you a real idea of what it’ll be like to pay for your own home. If you find yourself scrounging to survive then you aren’t ready yet and some things have to change. If you find you can live like this comfortably (or at least without any panic) you’re probably ready to dive into homeownership!