Why a budget is important

Buying a house is big commitment so you want to make sure that you don't bite off more than you can chew. This means that you are going to have to be very careful about determining the amount that you can afford to spend on your house. Knowing how to set your budget will save you a lot of trouble down the road.

Clearly a budget is important since it will allow you to know how much you can afford to spend on a house. There is little value in spending time looking at houses that you can't afford. Even worse would be to actually buy a house that you can't afford. It is important that you know before you start looking just how much you can afford to spend. This is something that you are going to have to make sure that you figure out for yourselves.

A lot of people get into trouble when they are buying a house because they allow the bank to tell them what they can afford. The usual procedure when you start looking for a house is to get pre-approved for a mortgage. The bank will largely base this on your income levels. However you have to realize that this is simply the banks calculation of the maximum that they will lend you, it doesn't mean that you can actually afford it. Instead you need to work out a budget to determine what you can afford to pay each month.

Working out a budget is fairly simple since ideally you should already have one. What you have to do is figure out what all of your monthly expenses are. You will then need to add the extra expenses that you will have when you own a house, like insurance, there are several others so make sure that you include them. You can of course subtract the rent and anything else that you will not have to pay when you own a house. Take this amount and subtract it from your net monthly income. This will tell you how much you can afford to spend on a house. Of course you don't want to spend all of that amount, you need a cushion and some savings so reduce the total by an appropriate amount.

Once you know what you can afford to spend each month you will need to figure out the total value of the house that you can afford. There are all kinds of online calculators that you can use to do this. You simply enter the interest rate, the length of the mortgage and the amount that you can afford to pay each month and it will tell you the amount that you can spend on a house. One thing to be careful of is that if you use a variable rate mortgage your monthly payments can go up so you will need to make sure that you have a cushion for that.