This is a collaborate post by Ellie Jo about real estate.
Whether you are considering buying your first home or looking for the next one, real estate investments can be a lot more complex to budget than you think. The number one complaint from first-time homeowners is the difficulty of improving their financial health when they approach the property ladder. Improving your finance involves the following elements:
- Increasing your earning potential
- Cutting down unnecessary expenses
- Maximizing short- and long-term financial goals
As an aspiring buyer, you will need to consider how much house you can afford to pay, which is precisely where your financial plan will come into play. It’s often safer to observe the real estate market to get an idea of prices and mortgages before defining your money goals. Homeowners will need to save for a deposit and to be able to afford their monthly mortgage repayment. Once you understand what you want to achieve, you can define whether your income, expenses, and savings are fit for purposes. If they are not, now is the time to figure out the best solutions to boost your earning, review everyday expenses, and create a saving roadmap. The sooner you start with your finance improvement journey, the sooner you can buy your dream home.
However, first-time homebuyers may face surprising challenges when they define affordability. Indeed, a property that appears affordable on paper may not look the same in your budget. Unsure about what is affordable? Here’s a breakdown of the many factors that can influence your house budget and transform your finances.
#1. Understanding the right level of debt
There will always be a level of debt when you purchase your new home. Indeed, unless you can afford to pay for the house in full, you will need to find a suitable mortgage loan. This is where debt management will play a significant role. You can find a variety of mortgage loans, some of which might let you borrow more than you can afford to repay. How do you know how much it is safe to borrow? Ideally, you want to focus on the debt to income ratio, which you can figure out using this dti ratio calculator. Usually, you are unlikely to qualify for a mortgage loan that will let you borrow over 43% ratio. Experts reckon that a DTI of 40% or over means great financial stress. The lower your DTI ratio, the better. It’s harder to stay on top of your debt when the ratio is high. In other words, just because you qualify for a loan, it doesn’t mean you will be able to afford it in the long term. You should try to keep your DTI between 20% and 40%.
#2. Chasing unexpected home costs
Millions of items are lost, damaged, or stolen in transit when you move homes. Homeowners are often left without any other option than to replace the missing items. Movers need to be cautious with their choice of removal firms. Many first-time homeowners fall into the trap laid by rogue, inexperienced, and often inexpensive companies. Those who don’t want to pay for professional services can face dramatic challenges when they organize the move by themselves. But those who trust unregulated businesses could face similar difficulties. Professional removalists will provide insurance cover for all damaged or lost items, which means that homeowners will receive fair compensation to replace broken or missing belongings.
Another unexpected cost occurs when you seek providers for your new home. A last-minute contract with a provider could be more expensive than planning ahead and comparing different suppliers before your arrival. Spend some time researching local providers so you can organize electricity, water, and even broadband services ahead. You are more likely to obtain discounts if you ask and plan ahead. Most companies will do a 3 to 10 days turnover to connect you to their grids. Planning early will reduce last-minute expenses for next-day services or temporary solutions.
#3. Research the area before moving in
It’s always the little things you don’t think of that can drive your budget down. Parking in your new town, for instance, could be one unexpected adventure. Did you know that searching for parking can cost Americans a whopping $73 billion debt a year? American drivers spend on average 17 hours every year searching for parking. To put it into perspective, it’s approximately a cost of $345 per year in terms of wasted time, fuel, and car emissions. Understandably, most of us are used to driving around and exploring back streets and small alleys in towns to find an inexpensive spot. But picture yourself in a new town trying to find a parking spot for your car. You are likely to spend a lot longer driving and searching. In some cities, such as New York City or San Francisco, drivers spend over 80 hours each year looking for parking, which wastes a lot of money.
When you are in a new area, you are more likely to get a ticket for illegal parking. It’s a risk as you explore your new location. Google Maps, Trip Advisor, and social media can be great sources of information to seek local knowledge and tips. Alternatively, you can also reach out to your new neighbors to hear about local parking spots.
#4. Living costs vary greatly
Where are you moving to? Living costs fluctuate over time depending on the inflation rate and the demand market. However, living costs also change completely from a city to another. For instance, if you are moving to Switzerland, the cost of living index is 122.4, using New York City as a reference. Norway is also more expensive than NYC, with a cost of living index of over 101. Of course, both these places will have matching wages to compensate for high costs. However, suppose you are moving abroad while keeping a remote position in the US as a digital contractor or a WFH employee. In that case, you might be surprised to discover that your wages will increase the DTI ratio significantly in places with a high cost of living index.
Additionally, you also have to consider taxes. As a US citizen living abroad, you will need to pay your taxes in the US and your location. In other words, the affordable lifestyle could become a problem.
#5. How much do I need to pay for the same quality of life?
As we’re comparing living costs, it’s essential to consider the cost of life quality and health services. Indeed, the American healthcare system delivers uneven levels of medical care and quality to the population. Disparities can affect access, waiting time, preventive measures, and inequality. It can seem alien for US citizens, but some places, such as the UK, have a free healthcare policy for all. Public healthcare is free for all residents and visitors as long as they have not traveled to the UK to seek treatment. Free or inexpensive public healthcare doesn’t affect the level of care an individual receives. But if you are living in the UK and moving to the US, it’s a different story. It will affect your budget. It’s worth researching and comparing healthcare costs, lifestyle comfort, transport, and community life in different areas. Essential expenses can vary depending on each local organization. Understanding how much it truly costs to maintain the same quality of life will be a game-changer. Is the service you get in your new location of the same quality as what you are used to? Do you need to pay extra to match your requirements?
#6. The true cost of food
It’s no mystery. Cooking at home will save you money. However, it could save you a lot more if you can stick to a reasonable food budget. Indeed, food waste takes up more space in US landfills than any other waste. The United States waste approximately 40 million tons of food every single year. It’s the equivalent of 219 pounds of waste per person. The problem with food waste is that it’s hard to manage it when you move homes. Indeed, if you’re exhausted by the move or stressed out as you discover your new location, you’ll be more tempted to order takeaway food. Additionally, if you’re moving abroad, it’s virtually impossible not to overbuy. Imagine moving into a little French village: You will buy most of the pastries and loafers in your local boulangerie because it’s exciting. Besides, you need to experiment with local products to find a routine that works for you. In other words, you spend too much on food you may not eat.
#7. Making the new home feels like home
Last but not least, decorating your new home can be a time-demanding process. A lot of new homeowners don’t budget for decoration and improvements, apart from essential repair works. Many tend to assume that they will plan a DIY project. However, DIY decoration doesn’t come for free. Unplanned DIY work could affect your budget and lead to high stress.
In conclusion, the affordable home may affect your budget in more ways than you know. The location can influence spending habits in terms of food, driving, healthcare, and overall quality of life. Additionally, you will need to consider costs relevant to the property, such as decoration, energy and utility providers, and removals. The bottom line: you will often end up spending more than you imagine. So make sure to leave some breathing room in your finances.