Setting a realistic budget for your new Connecticut home can be a little tricky—but not doing it can be disastrous. If you spend too much you can spend years strapped for cash, making it hard to enjoy your new home. If you spend too little, you'll probably end up with less home than you really want—and that won't make you happy, either. So how do you determine a homebuilding budget that's just right for you?
Part of the solution is to work backward when setting your budget. Too many prospective homeowners begin the process by collecting ideas and images of their dream house (including fixtures, flooring, countertops, and cabinets). Then, when they look at what all these great ideas are going to cost them, they’re shocked at the price. They may burn out their calculators trying to figure out how they’re going to pay for it. Chances are, they won’t even qualify for the loan. And that means resetting expectations. It’s hard, and it’s disappointing.
Instead, it's wise to figure out how much you can really afford and work backward to figure out what that home may look like. One way to do that is to qualify for your loan first. Lenders use qualifying formulas to calculate the amount you can afford to pay each month. While there is some variation, the basic formula compares your income to your debt payments. A general rule of thumb is that once you add up all of your monthly payments (house payment, car loan, charge cards, etc.) and divide it by your total monthly income, you'll want to be in the 33 to 36 percent range. To simplify it more, you'll want to keep your total monthly house payment at or below 25 percent of your normal monthly income.
Those figures aren't hard and fast rules; they're guidelines. Once you've identifies your income and your monthly debt, and have determined how much cash you're going to put into the down payment, your lender can work backward to tell you the total price of the home you can afford.
There’s one other aspect of budgeting that homeowners often over look: Making the budget too tight. Why is that an issue? If you lock yourself into a budget that leaves you absolutely no margin for error you could end up regretting it. What happens if you get into the planning for your home and find out that just a little bit more money will allow you to include a feature that will result in a home you’ll really love for years to come? If your budget is too tight you won’t be able to make adjustments or include upgrades. Will you still be completely satisfied with the home you build?
And what happens if your monthly income is affected by illness, injury, or even the economy? What if you have some kind of a major expense (such as having to replace a car)? That’s why it’s good to have a little bit of a cushion when you calculate your budget. Here's an article that talks a bit more about having contingency funds on hand when you start your homebuilding plans.
So, instead of asking, “How much will it cost me to build my dream home?” work backward from the question, “How much house can I really afford?” And when you arrive at a realistic budget, make sure you build in enough “cushion” to cover potential add-on and to cover you if you run into unexpected expenses.