One of the most important steps in becoming a home owner is to determine how much amount you can afford to spend in order to buy the house of your dreams. Purchasing a house is a big financial commitment, which is why it is extremely crucial to prepare a home purchase budget before taking the leap.

This section provides the guidelines for preparing the budget. These guidelines will help you assess the quantum of funds you can channel towards creating this indispensable asset.

Guidelines on how to make a budget – the 20/28/36 rule

Ideally, your home should not cost more than 2.5 times your gross annual income. However, this is only an estimation and you need to create a home buying budget to ensure that you can manage your finances prudently. While creating a budget, keep in mind the ‘20/28/36 rule of thumb’ for down payment, monthly mortgage payment and total payments towards debt. Ideally, the proportion allocated towards each of these payment heads should be as follows –

How to pick the right mortgage within your budget. Down payment should be around 20 per cent of the loan amount. Annual payments towards mortgage, insurance, maintenance, property taxes payment, should not exceed more than 28 per cent of your gross annual income. Housing expenditure and other debt expenses i.e. credit card debt, car loans, etc. should not exceed more than 36 per cent of your gross annual income.

Your home buying budget is also impacted by the expenses you incur towards payment of loan, in case you opt for it. Homebuyers often make a hasty decision while deciding on a loan without fully exploring their options. This is because home sellers often show more interest in bids by individuals who have a pre-approved loan. However, it’s always prudent to make your financial decisions meticulously and after due consideration. Before finalizing on a particular home loan, you should weigh your options after considering the following –

Interest rate on the home loan – Largely, depending on your repayment capacity, existing financials, interest rate type (fixed or floating), loan amount, loan tenure, etc. the interest rate may vary from a single digit to double digit.

Loan term – Generally, loans of shorter terms cost more per month as you would be paying off your loan faster as compared to the long-term mortgages. However, longer the loan term, higher is the outflow for the interest payments.

Terms and condition – You must also assess all terms and conditions viz. extra charges, penalties that you have to pay in case you wish to pay off the loan before the tenure or if you miss paying an EMI, etc.

All these factors would help you get a specific estimate of the total cost of the loan for the duration of your choice. While computing the total cost, you should also consider the processing fees, title and homeowner’s insurance, legal costs, property taxes, fees to record your deed and notary charges as well as advocate fees, etc. All these have a direct impact on your budget.

Take into account all perepheral costs before finalizing the budget When buying a home, apart from the basic cost of the house, you may incur expenses, such as brokerage, stamp duty, interiors, etc. Consider these costs before arriving at your budget.

Consider all these factors to create a realistic budget for your home.