The Home Buying Process - Establishing a Budget

By Carol Leah

The strength of a house is determined by the quality of its foundation. In the same way, the first steps to buying a home are often very important steps. Don't fall into the trap of overlooking things that may seem 'minor' to you, while in fact they could determine your ability to go through with the planned purchase of the home.

Establishing a budget that your family can live with while still being able to cater for any additional expenses and emergencies is a very important, foundational step in the home-buying process.

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Home buyers sometimes tend to concentrate on the 'obvious' things while searching for a home and simply assume that if the bank will loan them a certain amount of money they'll automatically be able to pay it back. In actual fact, there is much more involved in the process of purchasing a home than merely repaying the loan from the bank.

Renters do not have to worry about many of the issues that are simply not optional for those who own their homes. For first time home buyers and those without a substantial monetary down payment, most lending institutions will require what is known as private mortgage insurance. This insurance is there to protect the bank if you happen to default on your home loan before you've managed to build up at least 20% equity in the home you are purchasing.
In addition to private mortgage insurance, there is homeowners insurance to consider. Most mortgage lenders now require that you provide a certain amount of insurance placed in escrow (the amount varies according to the company) in addition to the amount of one month's insurance in each month's mortgage payments. This means that you are always paid up one year in advance on your insurance and if something happens, the insurance company won't find themselves in problems because you've allowed the insurance to lapse or simply cancelled the policy. It's another instance of the lender insuring themselves against potential irresponsibility on behalf of those purchasing a home.

Then there are taxes. No lender wants the property that they are covering confiscated and auctioned off to cover the price of taxes. Many lenders now insist that one year's worth of taxes be placed in escrow as well. Depending on the area in which you live and property taxes in that area, this can be quite an amount up front. Add to that the fact that you are also paying monthly 1/12th of the taxes owed on your property in addition to all of the above mentioned fees each month and you could have a hefty addition to your mortgage payment.

You should also consider that things breaking and falling apart will be your complete responsibility to fix, repair, or replace. You will not have the luxury of a landlord or maintenance staff when you own your own property and you'll therefore need to begin an earnest savings account in order to maintain and in some cases enhance your property.

Do you still want to buy your own home?

You should! You will have a definite advantage over the prospective home buyer who does not know these things. Now that you know about them, do establish a realistic budget that your family can live with when estimating how much house you can really afford. If you have all the facts in front of you it's much easier to be honest with yourself and plan according to what you can realistically afford and not simply the amount the bank is willing to lend.

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