Relocation = Renovation #3

Monday, November 4, 2013

How To Determine What You Can Afford For Your Home Renovation Project
 

We've all seen an "After" photo of a home renovation project and thought to ourselves "I would love to do that!"  I'm ready to make that thought a reality.  As Bubba and I have been house hunting our #1 concern has been budget.  Being first time renovators has us overly cautious about understanding expenses and not getting in over our heads.  I've started our journey by figuring out exactly what we can afford for a renovation project. 

Finding your budget is easy with a little math.  First you need to find your Debt to Income Ratio.  Here's what you need to do:

1) Create a list of all debts.  This includes your mortgage, credit cards, loans, etc.  This will be your Monthly Expenses.  (Do not include your utilities, groceries, and phone)

2) Determine your total gross monthly income.  Include all of your sources of income.

3) Now to find your Debt to Income Ratio.
  • Enter Total Monthly Expenses.
  • Total
  • Divide the total by your gross monthly income.
  • The total is your Debt to Income Ratio.
Now that you have your Debt to Income Ratio you can calculate how much you can afford for your project. 

Most lenders will tell you what Debt to Income ratio is needed for loan approval.   Since we are looking to purchase a home for renovation, we can include our renovation costs in the home loan.  This equation works well for our situation.
  • Enter your Gross Monthly Income
  • Multiply by your lenders Debt to Income Ratio
  • Subtotal
  • Subtract your Total Monthly Expenses
  • Subtract your total Monthly Utilities (this includes, utilities, phone, groceries)
  • The number you are left with is the Maximum Payment you can afford for your loan.
There are tons of resources online that can help you with your budget and calculations.  Just be honest about your expenses.  This will be the foundation of your project budget.  You want it to be sturdy and strong.

NOTE: Life is full of the unexpected.  Planning your budget for the Maximum Payment you can afford leaves you little to no wiggle room for those unexpected expenses.  Stretching yourself too thin can make life miserable.  Your home should be a place of love, inspiration and relaxation.  Breaking yourself to own it can cause serious resentment.   

There are so many things to consider when planning your renovation project.  Understanding what you can afford is just step one.  For the next Relocation = Renovation entry I'll share what I've learned about home values and renovation costs.  This is where I start to get a clear picture of how much renovation is within the real estate value and my budget.


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