Most folks do all the math they can find online about how much house they can afford. Then they think about what they are currently paying in rent and how much they’d be comfortable going up from there, if any. Finally, they hit up the mortgage broker, have them run the numbers and get some final, definitive answer on what the bank will allow them to finance and spend.
Somewhere amongst all those numbers they pick a price that sits well in their heart, their mind and, hopefully, their monthly budget, as a maximum home purchase price – complete with its corresponding monthly expenses like taxes and insurance.
Unfortunately, there are a few critical line items that commonly slip through the cracks of one or more of these calculations. Our mortgage pros only know what they have in front of them, which is mostly based on expenses that show up on our credit reports or loan applications. Additionally, when it comes to our DIY budgets, we often create our household spending plans based on our ideal spending patterns, vs. our actual ones.
One critical exercise to do before you lock in a price range is to look back at your bank statements and spending breakdowns from the preceding few months to see how your actual spending measures up against what you think it should be. Find the places where you need to either adjust your spending or your budget to reflect reality before you buy a home. The other critical exercise is to understand what expense categories should be factored into your calculus on how much house you can afford, even though they are commonly viewed by budget software and banks as discretionary or even luxury line items.
Here are four of those overlooked expense buckets to make sure you consider:
1. Essential “Extras.” Sometimes what we say is important to us is slightly different than what is really important, but I believe you can tell what someone values by what they invest their time, energy, love and money in. So, it’s no surprise that there are lots of meaty expenses that some home buyers-to-be see as essential which a bank or even a financial planner might not have on their radar screen.
Just a few of those items include:
- Charitable giving and religious tithes, dues and offerings
- Expenses related to caring for an aging parent
- Non-western health cares and therapies that are not covered by your insurance, like acupuncture, massage and chiropractic.
I call these out in particular because they are categories which millions of Americans spend hundreds or thousand of dollars on every month – and because there might be no place to even enter such an expense on a loan application or budget software. If you invest a great deal of cash into these items and value them enough to keep doing so after you close escrow, make sure you factor them into your own decision making about what you can afford. It’s permissible – even advisable – for your personal price max to be a lot lower than what the bank deems your top dollar.
2. “Superfluous” Cushion Stuffing. Ding dong, the recession’s over, folks! And we made it through. But during those long, dark years, many people cut back on investing and saving for rainy days and retirement days alike. If that’s you, and your personal economy has recovered enough to support buying a home, congrats! Just make sure you circle back to those recession-era cutbacks and correct for them before you increasing your monthly housing spend. You might want or need to save more than traditional financial guidelines would suggest in order to reposition your retirement or to fluff your cash cushion back up to your personal comfort level.
Make sure you don’t overextend yourself on a home without accounting first for stuffing the cushion(s) you’ll need in the future.
3. Enriching Experiences. Buying a home is one of the single-most high ROI (return on investment) life enriching experiences a person can have, if it’s done smartly and sustainably. But lots of us also invest lots of dough into other enriching experiences, and want to avoid being so cash poor we can’t afford any of them after escrow closes.
Some of the big-ticket items that you might be expending cash on to engage in include:
- Travel, vacations and family outings
- Trainers, coaches and therapists
- Yoga and mind-body wellness activities
- Retreats and workshops
- Schooling, conferences, basic and continuing education
If you decide you’re willing to cut back on these sorts of things or forego them entirely to redirect those funds into your home, that’s fine. Just make sure you go into that decision with eyes wide open, while you still have time to decide to spend less so you can continue to engage in these enriching activities.
4. Kid-related Cash Outlays. The honest-to-goodness truth about kidlets is as follows: they cost. Sure, the rewards of parenthood are well worth the cash expenses, but the costs are considerable and are often overlooked when it comes time to list out the line items relevant to how much you can afford to spend on housing. The big ones generally get on the list, like monthly child care for very young children and private school and college tuition for the older ones.
Lots of others get lost in translation of your ideal spending categories and allocations against where your money really goes on a monthly basis. Items that often get underestimated or flat-out omitted in this category include:
- Extracurriculars – language lessons, music lessons, clubs and classes
- Gear and equipment – all the gear they need to engage in the above, but also things like pricey school books and educational electronics
- College Savings – Whether or not you have a formal 529 plan, if you have children you hope to help pay for higher education, you should be allocating some level of regular savings for this.
ALL: What sneaky expenses have you underestimated when trying to build out a budget or understand what you can really and truly afford to spend on housing?