1. Set Your Budget
Before you start shopping for a home, determine your budget. A general rule of thumb is that your total monthly home payments should not exceed 36% of your gross monthly income, and your total monthly obligations (including your mortgage payment, taxes, and insurance) should not exceed 45% of your gross monthly income.
For example, if your total gross monthly income is $5,000, your monthly housing payments (including principal, interest, taxes, and insurance) should not exceed $1,800 (36% of $5,000 is $1,800) and your total monthly obligations (including your housing payment, car payments, credit card payments, etc.) should not exceed $2,250 (45% of $5,000 is $2,250).
2. Line Up Your Cash
Now it’s time to gather your cash so you know how much you can put toward a down payment before looking into home purchase options. Depending on the type of home loan you choose, you will be required to make a down payment ranging between 3.5% and 20% of the price of the home. (One notable exception is a VA loan, a government-backed mortgage for veterans that requires no down payment.)
It’s important to remember that with a down payment of 20% or less, you will have to pay for private mortgage insurance, which adds about 0.5% of the total loan amount to your mortgage payments for the year.