What Should My Budget Be for Buying a House?

Buying a home can be exciting, joyful—and a little scary. You may wonder, should I buy now or wait? How much can I afford? Will I get in over my head?

A well-built budget can be a good defense against making a mistake during the exciting, joyful, and stress-inducing process of buying a home.

It’s a good idea to set up a strong budget before looking at specific homes. The trick is to recognize the many factors that shape a good budget, so you’ll feel more confident before you start looking.

But you may be surprised to hear that budgeting goes way beyond knowing house prices in the neighborhoods you prefer.

“There are a lot of other costs to home ownership that people don’t always consider,” warns Suzanne Bartholomae, assistant professor and family finance extension specialist at Iowa State University^†.

Check out the steps below to learn more.

1. Step back to get the big picture.

It’s important to view homebuying in the context of your broader finances. You should budget for every penny, from personal taxes to clothing and groceries. Online calculators can help you compare various loans, estimate closing costs, and decide whether to rent or own.

With this information, you can do a rough estimate of what an affordable monthly mortgage payment may be. Bear in mind that property taxes vary by location and can have a major impact on your monthly payments.

The 28/36 rule^‡ is a helpful guide for calculating how much to spend on housing expenses. The rule suggests that, your payments, including property taxes and insurance, shouldn’t exceed 28% of your gross monthly income. (That’s $1,400 for a monthly income of $5,000.) It also recommends not spending more than 36% of your gross income on all debts. The 28% rule isn’t absolute, but higher house payments could require sacrifices elsewhere—more modest vacations, for example, or waiting longer to buy a new car.

2. Explore your mortgage options.

Mortgage costs are affected by the loan size, interest rate, and the length of the loan. (Learn more about how to compare mortgages.) To get a clearer picture, speak with a mortgage loan officer, suggests Vicky Scarnuley, a licensed real estate agent based in Connecticut^‡‡. (Find a mortgage loan officer near you.)

“They’ll help you determine your financial status, including your credit rating, income, assets and debt,” Scarnuley adds. After a review, you may pre-qualify for a loan at a certain level.

Keep in mind that the cost of your mortgage is affected by how big of a down payment you can afford. The more you put down, the lower your monthly mortgage payments can be; if you can put down 20%, you also may eliminate the need for costly private mortgage insurance.

Stretching to make a large down payment isn’t always the way to go, because your budget needs to take into account other expenses—closing costs on your purchase, moving in, furnishing new rooms, and having money to pay for emergencies to name a few.

3. Estimate your upfront costs.

Buying the house, closing the deal, and moving in may require chunks of cash from your personal savings.

• Closing. It’s easy to overlook a host of expenses known collectively as closing costs. These cover everything from mortgage application fees and attorney fees to home inspections, title searches, and up-front insurance costs. They are typically between 2% to 5% of the purchase price^§ ($2,400 to $6,000 for a house costing $120,000), though they can be higher. As part of your negotiations, the seller may agree to assume a portion of these costs, so discuss ways to lower costs with your agent.
• Moving. Nationally, costs for a move within a state average $1,250 (based on a two to three-bedroom move of approximately 7,500 pounds) and $4,890 for out-of-state (based on a two to three-bedroom move of approximately 7,500 pounds with a distance of 1,000 miles.)^¶ Packing your own boxes can save money, even if you’re using a professional mover. For first-time buyers with few possessions, a rental truck and friends can make moving downright cheap.
• Fixing. A house inspection during the purchase process—covering the heating system, plumbing, roof, insulation, and other major parts of the house^†† —can alert you to any immediate or looming repair needs. Unless the seller has agreed to take care of these issues as part of the sale, you should factor those into your costs.

4. Anticipate ongoing costs.

If you’ve not yet been a homeowner, it’s easy to underestimate the ongoing costs of ownership in addition to the new mortgage. These include:

• Utilities and maintenance. Utility bills can be higher than you think. For new homebuyers, call utility providers ahead of time. They may be able to provide estimates of monthly charges for a house you’re considering. Routine maintenance and ongoing home repairs are inevitable. If and when the roof starts to leak, you’re going to have to find a solution, and it helps to be prepared.
• The cost of the new neighborhood. If you’re further from your job, it could cost more to commute. Local facilities like daycare or a gym could be more expensive. As much as possible, estimate any higher costs of your new location beforehand and budget for it.

Knowing your range will help you avoid the disappointment of falling in love with a house, only to discover that it’s out of reach. Says Bartholomae, “Now, you’ll fall in love with houses you can afford.” For first-time homebuyers, the adventure is ahead of you.

Contact a Huntington mortgage specialist or learn more about mortgages and homebuying.