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

A home will most likely be one of the largest purchases you'll make in your lifetime. Learning how to budget for a house ensures you can reasonably afford the costs related to homeownership, such as a mortgage, property taxes, maintenance and homeowners insurance. Other factors, like the down payment for your home loan and ongoing costs like utilities need to be taken into consideration. That way, you’re not stretched too thin financially  after you get the keys to your home.

How To Budget For Buying A House: 5 Steps

Learning how to budget for a house first entails much you can afford— expense may include a down payment, closing costs, and repairs. You’ll likely face several other upfront costs and several ongoing expenses, on your homeownership journey.

Many experts recommend spending no more than 28% or your monthly budget on your mortgage payment — principal, interest, taxes and insurance, or PITI.

1. Calculate How Much House You Can Afford

Knowing how much money you should save before buying a house will help you feel more prepared during the entire process. It will also help you determine a budget for your home, preventing you from buying more than you can comfortably afford.

One rule of thumb to consider is the 28% rule. If you don’t spend more than 28% of your income on your mortgage payment, you are more likely able to afford your other financial obligations. For example, if your monthly salary is $6,500, then you should spend no more than $1,820 on PITI payments.

Lenders may prequalify you for a mortgage that is more than 28% of your monthly income. Sticking to this percentage, however, ensures you’ll be able to afford other housing-related costs like repairs and maintenance.

2. Determine Your Down Payment

Your down payment is the upfront amount you will need to pay at closing. This amount can be from your own funds, a gift from a family member, or through a qualifying down payment program. The amount you will need to save up for depends on the type of mortgage and its minimum requirements, and your home’s purchase price.

For example, FHA loans require a minimum 3.5% down payment, whereas VA loans don’t require one. Lenders offering conventional loans may allow you to make a down payment as low as 3%, though it’s still possible to pay up to 20%.

3. Factor In Closing Costs

Closing costs are also upfront costs you're responsible for as a home buyer when you finalize your home purchase. In general, you can expect to pay around 3% to 6% of the home's purchase price as mortgage closings costs and fees (not including the down payment).

As you budget for house buying, consider saving up for these costs as soon as possible:

• Lender fees: These may include origination fees or application fees.
• Title insurance: This is paid to insure your home against any claims against it.
• Title transfer fee: This cost is for officially transferring the title of the deed to the buyer.
• Attorney fee: You will need to pay a estate attorney as they finalize your home closing, if required in your state.
• Home appraisal: A home appraisal is typically required to assess the fair market value of the home.
• Home inspection: The home inspection may be part of your home purchase contract, where a home inspector assesses the condition of the home.
• Real estate commission: Although the seller typically pays this expense, you may be responsible for it if you’ve negotiated paying part or all of it. While not ideal, it could be necessary to convince the seller to sell the home to you, especially in a competitive market.

Be sure to speak to your lender and real estate agent to estimate any other closing costs you may have to pay.

4. Estimate Your Ongoing Expenses

The home purchase isn’t the only expense. You will also be responsible for ongoing expenses such as the following:

• Utilities: The average amount you'll pay for expenses like electricity and sewage will depend on where you live and your home's size. You may be able to estimate costs by asking about the average cost per month for your property.
• Maintenance and repairs: A good rule of thumb is to set aside 1% of your home's purchase price annually for maintenance costs. These can include lawn care, plumbing, electrical and many other different types of repairs.
• Property taxes: Property taxes will be different depending on your state, county, and municipality. Your lender will include this cost monthly in your mortgage payments which goes into an escrow account. Each year, the lender will then pay your property taxes.
• Homeowners insurance: Your lender will most likely require that you have a homeowners insurance policy. Even if not, having one will protect you financially in case of theft or damage.
• HOA dues: If your new home is part of a homeowners association, you'll most likely need to pay HOA fees. This amount will depend on the homeowners association and may be due monthly, quarterly or annually.

5. Plan For Unexpected Costs

Expenses may pop up unexpectedly, whether it’s a roof repair, paying to get rid of critters in your home or other repairs because of wear and tear. Saving up money in an emergency fund ensures you have enough to pay for these expenses without relying too much on debt.

FAQs On Budgeting For A House

To learn more about budgeting to buy a house, read these most frequently asked questions.

How much money should I save before buying a house?

It’s best to save as much as you can before buying a house. At the very least, you will need to save for expenses like a down payment, closing costs, and moving expenses.

How do I know what my budget for a house is?

You can determine what the budget for your house may be by paying no more than 28% of your monthly income in mortgage costs. You will also need to think about other ongoing costs like maintenance and repairs.

What’s the budget rule for buying a house?

The 28% rule suggests that homeowners spend no more than 28% of the monthly budget on the mortgage costs — principal, interest, taxes, and insurance. For ongoing costs, there are different budgeting strategies, like the 50/30/20 budget method.

What if I can’t afford to buy a house?

If a home purchase isn't in your budget, take the time to save more if closing fees and the down payment is a hindrance. Other steps include improving your debt-to-income ratio (DTI), boosting your credit score, and seeking down payment assistance.

The Bottom Line: Budgeting For A House Can Prepare You For Homeownership

Understanding how to budget for a house consists of both the upfront and ongoing costs of homeownership. Creating a budget and coming up with a plan to save for these costs ensures that you don’t get locked into a mortgage and home you can’t afford. To see what you may qualify for, consider applying for a home loan with Rocket Mortgage.