Taking Action – Home Budgeting & Planning
One of the biggest traps new home-buyers fall into is using the maximum amount a mortgage professional qualifies them for instead of making sure they buy within their actual comfort zone.
In other words, buying within their budget.
You can’t buy within your budget unless you have one, so let’s get at it.
Step 1 – Making a Household Budget
We give you a guide & checklist that will go a long way in getting you started and on the right track. Be sure and download it, trust me.
The first and most important step is to create a household budget, which allows you to see how much money is coming in and how much is going out.
Your budget will help you determine how much mortgage payment you can really afford. However, the guidelines for loan approval may actually let you borrow more money than you can afford.
The guidelines look at your debt to income ratio by comparing your gross income to your new housing expense and only the bills you have that are listed on your credit report.
A budget will look at all your bills and use your income that you actually take home, not your gross income. This will help you answer the most important question of all: Can you afford the mortgage payment?
How to Create a Budget
- Write down all your income on a monthly basis
- List all your expenses as monthly amounts
- Add up all your expenses
- Compare your expenses to the benchmarks.
- Housing – 35%
- Transportation – 20%
- Debt Budget – 15%
- All other expenses – 20%
- Savings – 10%
- Maintain Records & Track your budget
Steps 1 – 4 are an irrelevant waste of time if you do not put effort into accurately tracking what you’ve spent, where you spent it and was it inside you budget.
Using pen and paper is fine for short to-do lists and scratching notes down, but it is not suitable to track your budget and spending.
There are several full-on budgeting software products and plenty of smaller and more accessible online / cloud based tools that will serve the same purpose at a fraction of the cost.
Mint, Freshbooks, Quicken; there are plenty of tools and zero excuses not to use one.
Step 2 – Get a Credit Check
The next step is to get a credit check. It is extremely important that you check your credit immediately because repairing bad credit takes time to fix. If you have insufficient credit, it takes time to establish it.
You need to get a tri-merge credit report that provides your three FICO scores in one report from the three major credit bureaus: Transunion, Experian, and Equifax.
If you find errors on your credit report, it usually takes at least 30-45 days to fix anything with the credit bureaus because request must be done in writing.
If you find you don’t have sufficient credit, it will take time to build it.
Step 3 – Set up an Emergency Fund
The next step is to set-up an emergency fund. An emergency fund is money you save in a short term savings account to be used in emergencies only.
If you have nothing saved right now in the bank, your first goal is to save one month’s worth of bills in a savings account.
How do you know what one month’s worth of bills are? You should have done a budget in step one that would tell you your monthly bills.
You should make your savings automatic. You should setup an automatic deposit with your paycheck into a savings account that is not linked to your normal checking account.
If it is linked to your checking account, you will be tempted to spend it. I recommend setting up a separate savings account.
Step 4- Write Your Financial Plan
“If you fail to plan, you are planning to fail!” ― Benjamin Franklin
The first step is accomplished by taking out a piece of paper and brainstorming what you would like to accomplish financially in the next 1-5 years.
Better yet, wad that tired old paper into a ball and fire it toward the nearest trash can. You should really – and this is one of the strongest suggestions I will give throughout the entirety of this book – use a cloud based tool.
Evernote tends to be one of the more popular FREE choices, but there are thousands more. There are some very slick speciality budgeting tools – MINT being my favorite – that you can also use.
Don’t get me wrong, I always scratch my to-do list by hand at first.
Once or twice a month I grab the high points from my notebook and scan them into the cloud.
Then organize this list into time frames of when you want to accomplish them.
Break it down into goals you would like to accomplish in the next year, next 1-3 years, and next 3-5 years. This gives you your short-term, medium-term, and long-term financial goals.
Once they are penciled in old-school paper style, head over to Evernote and/or your email account and stick a few calendar reminders with the pop-up enabled so that you have ample reminders and no excuses.
Once you have organized your goals you will need to put an action plan in place to help you follow them.
This first-time homebuyer manifesto is specifically designed as an action plan that will work for the bulk of the first-time homebuyer set.
Follow the plan. Do it.
If you still have doubt that you are ready, keep reading to see if you meet the criteria that indicates you are “not ready to buy” right now.