How to budget for buying a house


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The American Dream — buying your own home — is sometimes perceived as an impossible dream. However, it can be achieved if you have a plan and stick with it.

When planning a budget for buying a house, you might ask yourself the following questions:

•   What are the costs/fees to consider?
•   How can I create a budget in order to reach my goal?

Remember that life goes on while you are saving for your new house. You’ll likely have other priorities and monthly obligations while trying to fit those new home costs into your existing budget.

Consider this priority list when planning ways to budget for a house.

Related: Mortgage calculator

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Upfront expenses

Once an offer on a new home is accepted, there are certain costs the buyer needs to pay right off the bat — and in most cases — out of their own pocket. These are called upfront expenses. Here are a few.

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20% down payment

You may have heard of the traditional 20% down payment guideline, which helps you avoid paying private mortgage insurance (PMI) on applicable loan programs.

Additionally, a higher down payment can sometimes result in better loan terms which may translate into lower monthly mortgage payments.

Yep, it’s a lot of money to try and save. But, if you can swing it, in the long run, applying a 20% down payment will likely save you from paying thousands of dollars in additional mortgage interest over the life of the loan The 20% down is a guideline.

The minimum down payment for a first-time homebuyer on a conventional loan can be as low as 3% and an FHA government loan that is open to everyone requires a down payment of at least 3.5%.

Sometimes exceptions can be found to minimum down payment requirements such as with Veteran VA loans or government USDA loans which will allow eligible borrowers to finance up to 100%.

In these instances, even if you save for a lower down payment, buying may still significantly reduce your overall expenses compared to your current rent and real estate market conditions.

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2-5% closing costs

You can likely expect to pay an estimated 2-5% of your home price for closing costs, so save accordingly. For example, if you buy a home that costs $150,000, you may be required to pay between $3,000 and $7,000 in closing costs.

Some costs are fixed and not tied to the price, so the percentage can be higher for the lower range and lower for the higher purchase price range. Keep in mind that there are alternatives to paying the closing costs out-of-pocket, such as requesting a seller credit, requesting a lender credit, or a down payment/closing costs assistance loan program.

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Moving costs

According to the American Moving and Storage Association, the average intrastate move is $2,300, and the average move between states is $4,300.

Costs can vary widely, so you might want to comparison shop for moving companies and factor this expense into your budget.

If you are moving for work reasons, check with your company to see if they offer a relocation package to help cover some or all of the moving costs.

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New furniture and appliances

Your new house may not have the same dynamics, dimensions and overall feel of your old house. That could mean that you need to buy new furniture, appliances and even items you may have never considered, like shower rods.

You might want to start a savings account for these types of adaptations — some of them may be unexpected.

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Ongoing expenses

PITIA (principal, interest, property taxes, homeowners insurance and other assessments) is an acronym describing all the components of a mortgage payment. The principal is the “meat” of the payment — paying down the principal will reduce the loan balance.

Interest is what you are charged for borrowing the money. Taxes refer to your property taxes. The insurance represents both your homeowners and mortgage insurance, if applicable. The other assessments refer to things that may be applicable to the home you purchase such as Homeowner Association Dues, Flood or Earthquake Insurance and more.

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HOA dues

HOA stands for Homeowners Association. These dues usually apply to a condo, co-op, or property owned in a planned community.

The charge is usually monthly (but it could also be charged quarterly or annually), and it typically goes to maintaining the community (landscaping, garbage collection, repairs and upgrades).

Ask the Homeowners Association for a complete HOA questionnaire so you can view how healthy the association is, whether there is any outstanding litigation due to structural or other issues, etc.

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Maintenance and lawn care

Your budgeting probably won’t stop once you’ve moved and settled into your new home. Expenses will likely continue to knock on your door. Landscaping, roof repair and water heater replacement are just a few items that might require ongoing financial consideration.

You may want to budget for 1% to 2% of the cost of your home in maintenance each year. However, deferred maintenance costs may depend on the age, quality of construction, where you live and more.

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Pest control, security and utilities

Cost for electricity, gas, water and phones may differ from market to market. This is also true with pest control, and making sure your home is secure and safe. You could find yourself paying more (or even less) for these services in your new home.

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Planning ahead

Do your research on the different types of mortgage loan programs and which programs may best suit you so you can start to budget for any down payment while taking care of current bills and other financial obligations.

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Calculating after-tax income

Here’s how to calculate after-tax income:

  • Subtract out all non-housing expenses that occur both now and that will occur in the future. 
  • Include savings goals; for instance, retirement contributions. 
  • Include any other debt that may be paid off before the house purchase.

Whatever is left over after this subtraction is what may be put toward housing costs.

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What are your savings goals?

Once you determine which loan program(s) you may qualify for, you can begin to put together an estimate on how much money is needed to be saved each month in order to meet the target date of a home purchase.

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What are your priorities

Take care of your current obligations first, especially if they have to do with the money you owe. Ridding yourself of debt may help you achieve your goals.

This may also help improve your financial profile so that the best loan deal may be more available.

You may also want to establish an emergency fund that, in a pinch, can keep you from using your credit card and running up even more debt.

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