Buying your first house is an exciting adventure. It’s also one of the largest purchases you’ll ever make! Knowing how to budget for your first home, and how to financially prepare, is the best way to start your journey to homeownership off on the right foot.
Depending on the real estate market at any given time, mortgage companies are often more than willing to approve you for a loan that’s well above what you can reasonably expect to afford. To avoid looking at houses outside of your budget, it’s important to know what you’re willing to spend going into the home buying process.
Many mortgage lenders offer a first time home buyer loan that allows for as little as 3% of the total home purchase price for a down payment. Conventional loans typically require closer to 20% in order to avoid any private mortgage insurance (PMI). If you don’t have 20% to put down on a home, you can expect to pay a few hundred dollars each month in PMI until you’ve paid down 20% of the total cost of your home.
What you offer on your house isn’t the final sticker price! Expect to pay 2-5% of the total home price in closing costs to realtors and the title company.
Ongoing Mortgage Payments
Having a large enough down payment is only the first piece of the puzzle. In order to feel comfortable in your new living space, you need to have enough cash flow to comfortably cover your monthly mortgage payments. In general, it’s wise to only spend up to 30% of your monthly income on housing.
This includes your mortgage payment, home insurance, utilities, and any other house-related expenses you have (like Homeowners Association fees). Speaking with your bank, or mortgage lender, or even using an online calculator to determine what your monthly mortgage payment will be can help you reverse engineer your home-buying budget.
Home shopping can often lead to feeling as though everything you want in a house is a dealbreaker. Think of the countless HGTV shows where someone wants a mansion on acreage that’s also a 5 minute walking commute from work and their child’s school, and has a built-in fireplace and a deck - all on a shoestring budget.
It’s an easy trap to fall into!
Instead, get clear on what is a dealbreaker for you and your spouse or partner. This list should be short but very focused. For example, a certain number of bedrooms, or a home office for remote work, may make your list.
Then, you can have a little bit more fun with a “wants” list. This list can contain anything you’d like to see in your dream home, but won’t necessarily walk away from making an offer if an otherwise-great house doesn’t have one. This might be a play room or loft space for kids, a large yard with mature trees, or even a basement guest suite for grandparents who want to visit.
Of course, no home only costs what you pay to your mortgage company each month. Far from it! Ongoing maintenance and other expenses should be part of your consideration process. For example, older homes may require more ongoing maintenance that can be expensive. If this isn’t a dealbreaker for you, preparing in advance with a larger emergency fund or a separate savings earmarked for home repairs and expenses can help you mitigate the impact of unexpected costs.
Finally, as you start to look for houses and a mortgage lender, shopping around for the best rate can save you thousands of dollars in the long run.
Buying a home and moving is a major life event. Having a financial advisor in your corner who has your best interest in mind can help you make the best possible decision for you and your family, and to rest easy that you’ve prepared financially for this new venture.
You can get in touch with us to learn more about working with a fee-only financial advisor by clicking here. We’d love to hear from you!
Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs, and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.
"Finance Made Simple" blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.