Purchasing a home is an exciting and significant life decision. It’s a great way to build equity and stability while you put down roots in a community. But reaching this milestone takes some financial planning, and you only want to buy what you can comfortably afford.
Beyond the mortgage payment and one-time upfront expenses like the down payment and closing costs, there are ongoing costs to take into account. Let’s look at some of the expenses you can expect as a homeowner, along with budgeting and financial tips that can help set yourself up for home-buying success.
1. Examine Your Expenses and Credit Report
Understanding your current financial situation will help lay the groundwork for your home-buying budget.
Debt and Income
Look at your income compared to any debts, including:
- Car loans
- Student loans
- Credit card payments
- Personal loans
- Alimony and child support
During the mortgage application process, your lender will review your monthly debt obligations to ensure that you’ll be able to manage your home loan. It provides peace of mind for you as well; you don’t want to be in over your head and stress out over your mortgage payment every month.
Credit Report
Getting a copy of your credit report prior to applying for your mortgage is a smart move. It’s a proactive step to ensure your credit is in an optimal place before you begin filling out home loan applications. Your credit report will have information about your credit and payment history and outstanding debt. You can request a free credit report from one of the three credit bureaus: Equifax, TransUnion and Experian. Scrutinize the information and review it for accuracy.
Your credit report and amount of debt compared to your income are major criteria when qualifying for a loan. Reducing excessive debt and getting your credit in order before meeting with a lender can help put you in a more favorable position for a mortgage.
Everyday Expenses
In addition to examining your debt, you’ll want to understand your everyday spending. Calculate how much you spend each month on groceries, entertainment, phone, internet, gifts and travel, as well as how much you put toward savings.
Estimate Future Costs
When preparing to buy a home, you should also anticipate the ongoing expenses associated with owning one, such as:
- Property taxes
- Insurance
- Utilities
- Routine maintenance and repairs
- Any applicable homeowners association (HOA) fees
While you may not know the exact numbers yet, estimating your total monthly expenses can provide insight into how much of a mortgage payment you could afford based on your current household income.
2. Determine What a Comfortable Mortgage Payment Would Be
It’s important to ensure the home you’re buying aligns with your budget. Keep in mind that you’ll have new homeowner-related expenses, such as taxes and insurance, along with your current expenses like groceries, transportation and debt obligations.
And don’t forget about your savings goals. Whether you’re building a retirement nest egg, growing an emergency fund or saving for your child’s education, you should still have some wiggle room to put away some money every month. You want to avoid putting the majority of your income toward house-related expenses, leaving little funds left for saving and enjoying life in your new residence.
A mortgage eligibility calculator can help you estimate your borrowing power for a variety of down payment and loan scenarios. But remember, you should still borrow only the amount that suits your individual circumstances. Only you can make the best financial decision for yourself.
3. Save for Your Down Payment
A down payment is often seen as a major barrier to homeownership for first-time home buyers. While a 20% down payment is typically cited as the standard to avoid mortgage insurance, several government-backed loan programs allow for lower down payments, as little as:
- 3.5% for FHA loans
- 3% for some conventional loans
- 0% for qualifying service members through the VA’s home loan program
Research your options, see what you may qualify for and start saving! The higher your down payment, the less you’ll have to borrow. Here are some down payment savings tips:
- Set up automatic transfers from your checking account to a down payment-designated savings account – schedule the transfers for your paydays so you save the money before you have a chance to spend it
- Cut back on extraneous spending and put the money you save toward your down payment
- Allocate any bonuses, raises, tax refunds or windfalls directly to your down payment saving
4. Save for Extra Expenses During the Buying Process
Have a solid down payment? Congratulations! That’s a strong step in your homeownership journey. Keep up your savings momentum as you go to contract and get ready to close. Build a cushion of funds to cover other expenses such as:
- Closing costs
- Moving truck rental and relocation costs
- Utilities
- Taxes and insurance
- Professional house cleaning
- Painting, floor refinishing and other updates and renovations
- New furniture
- Yard maintenance
5. Consider Later Home Expenses
Consider future home expenses when determining your home-buying budget. Homeownership is a long-term commitment, and once you get the keys, you’ll be responsible for any maintenance, repairs and renovations. Certain tasks, such as snow removal, can be predicted, while others can be dangerous and costly surprises, like dealing with a termite infestation or storm-related structural damage.
If you’re thinking about purchasing a fixer-upper, be sure you know what you’re getting yourself into financially and if you have the funds to tackle extensive home renovations. If you have your hopes set on a new kitchen, extra bathroom or upgraded appliances, consider how these will fit into your budget — will you take out a second mortgage when the time comes or save up the money?
Buying a home is a big financial decision, and the home you select needs to fit your budget. Being a financially savvy homebuyer involves researching, saving, practicing good money habits and preparing for both expected and unexpected expenses. Knowing you can afford your house can give you peace of mind to relax and enjoy your home and the fruits of your labor.
