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How Much Should I Spend On My First Home?

According to Douglas Elliman, before you start looking for a home, you should have your budget in mind.
According to Douglas Elliman, before you start looking for a home, you should have your budget in mind. Photo Credit: Getty Images

One of the biggest questions for first-time homebuyers is, "How much can I afford?" Before you start looking for a home, you should absolutely have your budget in mind. You don’t want to fall in love with a home that’s out of your price-range only to be disappointed that you can’t afford it. Here are some tips on how to determine your home-buying budget.

Can you use your rent as a good indicator of a monthly payment?

When determining a budget, there are two questions: What can I afford to pay every month? And, what can I afford to purchase?

Some buyers might start their search thinking their current rent is a good indication of budget, which isn’t always the case. To get a concrete understanding of what you can afford, the very first step is to speak to a mortgage broker to find out how much of a loan you qualify for if you’re financing. Once you know the loan amount you are pre-approved for, then you can take into consideration your reserves, but always be sure to factor in closing costs. Additionally, your budget will differ depending on the type of property and the kind of mortgage.

Co-ops tend to be more conservative with their requirements on down payment (minimum of 20% down) and usually require two years’ worth of monthly payments in reserves. Co-ops also tend to require a 25% to 30% debt-to-income ratio.

Condos and houses follow the requirements of the lender, which sometimes ask for less funds in reserves and allow more flexible financing options.

Is it necessary to get pre-qualified before you start your home search?

Yes. The Westchester real estate market is fast-paced and successful home searches begin with a pre-qualification. This should be the very first step in the buying process. Usually there are no fees to do this and it’s as simple as a 15-minute phone call with a mortgage broker. Some buyers may feel comfortable with the mortgage broker where they bank since their financial information is already on hand. That’s okay for a pre-qualifying letter to start your search, but sometimes it pays to shop around. When the time comes to actually get a mortgage, check with your real estate agent who will provide you with a list of experienced mortgage brokers for you to speak with.

Is the amount you are pre-qualified for the high-end of your budget?

Yes, the amount you are pre-qualified for should be the high-end of your budget. Since monthly charges and taxes differ on every home, you should take this into account and also keep in mind that the interest rates could possibly change by the time you are ready to buy.

How do monthly taxes factor into your budget?

Some condos have abatements and therefore have very low monthly taxes. These abatements eventually expire, so you should find out when that will happen and the amount of the unabated taxes. Taxes for a house are usually advertised per year and can often be escrowed by your lender and be rolled into your monthly mortgage payment. A co-op’s taxes are rolled into the maintenance charges and remain relatively stable unless there is a special assessment for building improvements. 

What other additional costs can you anticipate beyond the home price?

Closing costs vary depending on the kind of property that you’re buying. There are also other fees that may apply, for example the mansion tax, which is 1% for properties over $1 million. Occasionally a co-op might charge the buyer a flip tax which can be around 1%. Be sure to consult your real estate broker for the estimated closing costs on the property you intend to buy.

No matter what type of home you are interested in buying, Westchester offers a variety of choices in every price range. Here are a few examples of what is currently available. To learn more about these homes and other options, please visit us at Elliman.com/Westchester.

84 Oregon Avenue, A

BRONXVILLE, NY 10708

2 BRS | 2 BATHS | 1 HALF BATH | $575,000

https://www.elliman.com/newyork/sales/detail/612-l-614-16_h6141481/84-oregon-avenue-bronxville-ny-10708

225 Commonwealth Avenue

CHESTER HEIGHTS, MOUNT VERNON, NY 10552

3 BRS | 3 BATHS | $970,000

Single Family Home

https://www.elliman.com/newyork/sales/detail/612-l-614-16_h6135184/225-commonwealth-avenue-chester-heights-mount-vernon-ny-10552

44 Pierce Drive

MOUNT PLEASANT, PLEASANTVILLE, NY 10570

5 BRS | 2 BATHS | 1 HALF BATH | $899,000

https://www.elliman.com/newyork/sales/detail/612-l-558-16_h6119915/44-pierce-drive-mount-pleasant-pleasantville-ny-10570

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