There is no right or wrong answer to the question of how much you should spend on a starter home. It varies based on factors such as your current savings, how long you plan on staying in the home, and your monthly budget. And that’s just the start.
Of course, you need a basic idea of how much you should spend. That’s the only way to know where to start your search and how to proceed through the process to close.
Here are three simple things you can do to better understand how much you should spend on a starter home:
1. Review Your Current Budget
Until you do this, there’s no way of knowing for sure how much you can afford to spend on a starter home. If you pass over this important detail, you could end up buying a home that puts too much strain on your monthly budget — and that’s not something that you need as a new homeowner.
Once you know how much you’re currently spending on housing every month, it’s easier to decide where to go next.
2. Get Pre-approved for a Mortgage
It’s one thing for you to have an idea of what you want to spend on a starter home. It’s another thing entirely to know what you qualify for in regards to a mortgage.
A pre-approval provides a better idea of how much you can borrow from the bank. This alone will help you narrow your search.
Tip: You don’t have to spend what you’re pre-approved to borrow. For example, a bank may pre-approve you to borrow $200,000, but your monthly budget tells you that anything over $150,000 is a stretch.
3. Decide on a Down Payment
Your down payment goes a long way in helping you decide how much to spend. As a general rule of thumb, you want to put down a minimum of 20 percent. This allows you to avoid private mortgage insurance, while also providing equity in your home from the start.
So, if you’ve saved $20,000 for a down payment, consider homes that are priced at no more than $100,000.
Only you know how much you can afford to spend on a starter home. Only you know how much you want to spend on your first home purchase.
As you gain a better understanding of your finances, it’ll become clear how much you should spend on a starter home. And when it does, you can begin the buying process with great confidence.