How to Budget for Your First Home

How to Budget for Your First Home

Posted February 12, 2020 in Real Estate

So you’re ready to buy your first home. Great! Home ownership is a unique gift, one that will continue to give back to you in time if you treat it right. As such, however, it’s a major investment that can only come from careful planning, dutiful research, and a disciplined budget. Completing such a large purchase may seem daunting, but we’re here to show you how to budget for your first home.

Plan Ahead

Saving for a house isn’t the same as saving for a new couch or even a new car. You’ll need as much preparation as you can get, so the sooner you start looking, the better. Have a look at homes for sale in areas you’re interested in as early as a couple years before you’re ready to buy to get an idea of the price range.

In addition to pricing, browsing early can help you determine your priorities. How big of a house do you want? Is location super important? Are you adamant on a pool even if it costs more? Figuring out your must-haves will also help you determine how much you could potentially spend.

Set a Budget and Don’t Budge from It

Once you have a general idea of what you’re looking for in a home, you can start setting up a proper home-buying budget. Assuming you don’t already maintain a budget, a good starting point is to add up all your monthly take-home income and subtract from that total all your monthly expenses.

Let’s say your monthly take-home income is $6,000. Your non-housing monthly expenses come out to $3,000, leaving you with $3,000 each month. However, it would be a folly to use $3,000 as a measuring stick for how much home you can afford.

Generally, you should aim to keep your housing costs at 25% of your monthly take-home income. In the above example, you’d want to keep your mortgage payments at $1,500, give or take a few hundred dollars.

Consider the Additional Costs

For most renters, rent and utility payments are the only recurring housing costs each month. However, when you purchase a house, you’ll have to consider additional costs on top of your monthly mortgage payment.

Depending on the condition of the home you’re purchasing, you may need money for repairs or renovations. A maintenance fund is another good idea – even routine fixes can pile up when you no longer have a maintenance crew on-staff to handle them for free. Then there are HOA fees, property taxes, homeowner’s insurance, and more. Even utilities bear considering, as houses typically cost more to heat and cool than apartments.

Depending on the type of home you purchase as well as the location, some of these fees may not apply to you. But rest assured many of them will, so it’s vital you weigh these additional costs when coming up with your monthly housing budget.

Get Down with the Down Payment

And so we arrive at the dreaded down payment. You’ve probably always heard that you must be ready to drop anywhere from 10% to 20% as an upfront down payment. Allow us to break that myth for you.

While some people may still want to complete a large down payment, it is absolutely not vital to purchase a home. In fact, the average first-time buyer only puts 7% down, and many loans and programs available to first-time buyers require even less than that.

As with most components of your home-buying budget, what you choose to put down will depend on your situation. You may find it advantageous to make a hefty down payment if your income isn’t great but you have a lot saved up, as this could lower your mortgage payments and help you avoid private mortgage insurance.

But don’t let the myth of a mandatory 20% down payment scare you away from home ownership.

Get Pre-Approved

Unless you hit the lottery or strike rich from an oil deposit, you’ll likely pay for your first home with a mortgage loan. Getting pre-approved for a loan from a trusted lender will set the bar for how much home you can afford. However, what you can afford isn’t the same as what you should buy.

You’ve Got This!

Even with this budgeting guide, buying your first home may still feel overwhelming. We understand! Just remember: countless people have done this before, and you can too.

Leave a Comment