Whether it’s your first or forever home, buying a property is an exciting time. Making the decision upfront to live below your means is one of the smartest financial moves you can make, with long term impacts that benefit both your financial health and quality of life.
So what does it mean to buy below your budget? We’ll walk you through what this is and how to do it so that you can make smart financial decisions if you’re looking at home in Walker, San Jacinto, Trinity, Houston, Madison, and Grimes County, Texas.
Understanding Home Buying Limits
How Mortgage Qualifications Work
If you’re a first-time buyer, you may not understand how the mortgage process works and that’s ok! When you apply for a mortgage, lenders will look through your financial history and current situation to determine how much they’re willing to let you borrow.
This process involves evaluating your income, debts, credit score, and any down payment amount you’re looking to put down in cash on the property you buy. These factors are used to calculate your debt-to-income (DTI) ratio, which tells lenders how much monthly repayment you could afford to make given your current circumstances.
Lenders prefer a DTI of under 43%, meaning that your total debts, including your new mortgage payment, should not exceed 43% of your gross monthly income.
What Does Buying Below Your Budget Really Mean?
You’re likely wondering “how much mortgage can I afford?” and that’s a great question to ask yourself upfront. Once you know what you’re approved for, you may think that’s your maximum budget, and in some ways, it is. But buying below your maximum budget means that you’re going to purchase a home that costs less than the maximum amount you’re approved to borrow.
For instance, if you’ve been approved for a $300,000 mortgage, buying below your budget means that you could choose a home priced significantly below this, around $200,000 to $250,000.
This approach means that your mortgage payments will be more manageable and also leaves you space in your budget for other priorities.
Why Lenders Set Qualification Limits
It’s important that lenders set limits on how much they’ll approve you for as they want to minimize their own risk and ensure that borrowers can afford their monthly payments. They want to be sure that you’ll pay them back, so need to know that you can pay in a timely manner.
Limits are based on your financial health, not just the income that you make. Your current debts and repayment history on loans or debts you’ve had before are all important factors too. But just because you qualify for a set amount doesn’t mean you need to use it all. Opting for a lower mortgage amount can provide you with more financial freedom and stability.
Benefits of Buying Below Your Means
Financial Stability
According to the Federal Reserve, around 15-20% of the median household income is spent on housing. Purchasing a home below your financial means is one of the best ways to ensure future stability.
You’re reducing your overall home expenses, which means you have money freed up for other essential financial goals. Saving for retirement, building an emergency fund, and investing are all good ways to save your money, so this extra cash you’re not spending on a home each month can go a long way!
Reduced Financial Stress
Living within your means in all aspects of your life can reduce your financial stress and help you develop a healthier, more balanced lifestyle. A survey by the American Psychological Association found that 64% of Americans report money as a significant source of stress in their life. By keeping your housing costs manageable, you can reduce this stress and enjoy a higher quality of life.
Savings on Interest
When you purchase a less expensive home, you’ll be saving on interest payments over the lifetime of the mortgage. For instance, a 30 year mortgage on a 3.5% interest rate would look like:
- $184,968 in interest on a mortgage of $300,000
- $154,140 in interest on a mortgage of $250,000
Simply by purchasing a home $50,000 less than what you were approved for can save you over $30,000 over the lifetime of the loan. Think of all the opportunities you could have with that extra $1,000 a year in an investment account or emergency fund.
Lower Property Taxes
The more expensive your home, the more your property taxes will likely be. In the time you live in your new home, you’ll likely see an increase here as the value of your property rises. So the lower you can start, the better.
In Texas, the average property tax is around 1.69% of the home’s value. For a $300,000 home, that’s over $5,000 a year. But a $250,000 home is around $4,225, saving you $845 per year. Over a 30-year mortgage, that’s more than $25,000 in savings.
Practical Tips For Buying Below Your Means
Set a Realistic Budget
The best place to start when looking for a home is to set a realistic budget. Calculate what you can comfortably afford in the area you’re looking in, rather than what you might qualify for. Use online mortgage calculators to estimate your monthly payments and make sure they fit within your personal budget for each month.
Prioritize Wants vs Needs
You should also think about how you can prioritize needs rather than wants when you’re shopping around for a house. Think about what you’re willing to compromise on and what aspects of a home are less critical. This approach helps you to stay within budget, without sacrificing the quality of life you’re looking for.
Consider Long Term Financial Goals
Long term financial goals may feel abstract and easy to catch up on later, but in reality, most people who don’t prioritize these goals will never achieve them. Think about your objectives for the future, like retirement, a child’s college education, or travel plans. By keeping your home costs low, you’ll have more money to allocate to these long term goals in your budget.
How a Credit Union Can Help
Your local credit union offers a variety of home loan options designed to meet your needs. By choosing a credit union for your mortgage, you benefit from personalized financial advice, competitive interest rates, and a commitment to your financial well-being. Our team is here to help you navigate the home-buying process and make smart financial decisions.