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How To Budget For A House: A Guide For Home Buyers

Dan Miller6-Minute Read
May 28, 2022

If you are in the market to buy a home, it's even more important than usual to stick to a budget. Knowing how to budget for a house can help you from becoming "house poor," when too much of your monthly expenses are tied up in your house. Remember that when you own your home, it's not just your monthly mortgage payment that you have to account for — there are utilities, taxes, insurance, PMI, repairs and other unexpected expenses. When you learn how to budget for a house, you can make sure you remain in good financial health.

How To Budget When Buying A House

To properly budget for buying a house, you’ll need to consider all the costs of homeownership, not just your mortgage payment. A successful house budget should include upfront fees (such as your mortgage closing costs) as well as long-term expenses (such as property taxes and homeowners insurance).

When you are creating a budget to purchase a home, there are a few rules of thumb that can help you in making sure that you're not buying more home than you can afford. One budgeting rule is the percentage-of-income rule or 28% rule. This guideline says that no more than 28% of your gross income should go toward your monthly mortgage payment. Some mortgage lenders will use this as an indicator of how much of a loan they will approve. It is important to understand that these rules may not be applicable for all home buyers (for example, those in high cost of living areas should anticipate a higher percentage of their income to go to housing costs).

Calculate How Much You Can Afford

Especially in a hot housing market, it can be very easy to let your emotions goad you into paying more for your home than you wanted to. Determining how much house you can afford before you begin shopping is one way to keep your emotions in check. Using the 28% rule can give you a ballpark for how much you will want to spend each month on your monthly mortgage payment. You commonly see the acronym PITI (principal, interest, taxes and insurance) as shorthand for your monthly mortgage payment.

Note that the amount a lender qualifies you for may be more than you can afford based on your current spending habits. While lenders have guidelines that help make sure that you can afford the loan, they don't know the details of your finances like you do. Keeping your monthly PITI payment around 28% of your gross income should ensure that you have plenty of money left over for other housing-related costs like utilities, repairs and maintenance.

Determine Your Upfront Costs

When you buy a home, in addition to planning for your ongoing monthly expenses, you'll also have some upfront costs that you'll want to budget for. Make sure that you have enough money saved up to account for each of these:

  • Down payment: A down payment is the upfront cost that most buyers are aware of. How much you should save for a down payment depends on the type of loan that you're applying for, but often ranges from 5% – 20% of the home's purchase price.
  • Closing costs: Closing costs include items like lender fees, points, deed recording and other one-time costs. These items are paid at closing and can cost several thousands of dollars.
  • Home inspection: You'll likely want to have a home inspection before purchasing the home, to understand the condition of the home. A home inspection should cost $400 – $700, depending on the size, location and condition of the home.
  • Real estate agent commission: If you're working with a real estate agent, you likely signed an agreement promising him or her a commission. This is typically 3%, though it is also common that many buyers will have their agent’s commission covered by seller concessions.

Estimate Your Monthly Or Yearly Expenses

Once you've gone through closing and paid all of the upfront costs associated with buying a home, you can now turn your attention to ongoing monthly or yearly expenses.

  • House utilities: The average cost of utilities for homeowners varies widely depending on the size, details and location of your home. You can usually call your local utility companies to get a 12-month average cost of utilities for a property before you close. That way you can budget for how much they should likely cost you.
  • HOA dues: If you are buying a home that is part of a homeowners association, it likely comes with monthly dues. These may or may not be included in your monthly mortgage payment.
  • Maintenance and repairs: One of the joys of owning your own home is being responsible for anything and everything that breaks. A good rule of thumb is the 1% rule, which states homeowners should save 1% of the home purchase price annually for repairs.
  • Property taxes: Property taxes vary by state, county and municipality, and are generally assessed annually or semi-annually. Many loans include an escrow account where you pay a specific amount monthly and then the lender pays taxes and insurance out of that account when they are due.
  • Homeowners insurance: Your lender will almost certainly require that you have homeowners insurance on your new property. Make sure to shop around with different agents and brokers and find the right insurance policy for your budget.
  • Home warranty plan: If you want to cover yourself against unexpected repairs and maintenance, you might consider a home warranty plan. Home warranty plans offer coverage for many of your home's basic systems.
  • House emergency fund: In addition to having a regular emergency fund, you might want to consider having a separate house emergency fund to cover unexpected house repairs or maintenance.

What Should You Do If A Home Purchase Doesn’t Fit In Your Budget?

Here are a few steps you can take to make room for a new home purchase in the budget and avoid becoming house poor.

Improve Your Debt-To-Income Ratio

Reducing your debt-to-income (DTI) ratio by paying off other outstanding debts (such as credit card debt) can help your finances in several different ways. First, you will free up your income for a house purchase and potentially qualify for a better mortgage. Secondly, you'll have additional money each month for ongoing housing expenses.

Research Home Buyer Programs And Grants

Another option is to look into grants and homeownership programs. This can include programs like down payment assistance that can make homeownership more affordable.

Find Places To Cut Costs

If you find that your monthly budget just doesn't have enough room to buy the house you're looking for, you can also look to cut costs across your budget. Reducing costs outside of your housing expenses will free up more money to put toward housing expenses each month.

Generate More Income

If you've already cut your budget as far as you feel comfortable, the other way to make more room in your budget is to generate more income. This might be getting a raise in your current job, getting a higher-paying job or starting a side hustle. One side hustle that you might keep in mind is renting out a room when you purchase your home to generate some passive income.

Look Into Other Types Of Home Loans

Other types of loans may make homeownership more budget-friendly than others. If you qualify for a VA loan, for example, you may not have to pay a down payment and also not have to pay private mortgage insurance.

Refinance Your Current Home Loan

If you currently own your home and are looking to buy a new home, you might want to consider refinancing your existing loan. If you can find a lower rate or term, it might help you save for your next home purchase. Just make sure to run the numbers and make sure that the monthly savings are more than the upfront costs you would pay with a refinance.

The Bottom Line: Budgeting For A House Can Simplify Your Buying Process

Homeownership can be an important milestone, but you'll want to make sure that you're ready for it and have a solid budget for buying a house. In addition to upfront costs like a down payment, closing costs and prepaid items, you'll have ongoing monthly payments. Additionally, there are costs for taxes, insurance, utilities, repairs and maintenance that you need to account for. To learn more about budgeting for a house, make sure and read our guide to buying a house.

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Dan Miller

Dan Miller is a freelance writer and founder of PointsWithACrew.com, a site that helps families to travel for free/cheap. His home base is in Cincinnati, but he tries to travel the world as much as possible with his wife and 6 kids.