How to Budget for a Home

It’s easy to find your perfect home and be fixated on the sale price, but there’s more to buying a home than just the price of the property. Whether you’re planning on buying a home for the first time or the fifth, knowing how to budget for a home will ensure you’re prepared for the process.

Mortgage Payments

The most obvious cost you need to account for is your monthly mortgage payment. When you’re considering looking for a new home, you can use mortgage and home affordability calculators to estimate how much you could expect a mortgage to affect your finances. If you’re serious about buying a new home, it’s highly recommended that you get pre-approved with a lender. Among other benefits, a pre-approval will outline how much home you can afford and how much of a loan you qualify for. Your loan originator will work with you to find the right loan type for your needs and budget.

Down Payment

Depending on the loan type you go with, you may have to set aside anywhere from 3% to 20% of the home’s value for a down payment. While the fabled “20% Rule” is more common for conventional loans, many federally backed programs have low down payment requirements, such as FHA loans, and some don’t require one at all, like USDA and VA* loans. Additionally, look into what down payment assistance programs are available to see if you can save in this area.

PMI

If you go with a conventional loan, you’ll likely have to pay private mortgage insurance (PMI) if you put less than 20% down. This extra amount is added to your mortgage statement until you’ve gained 20% in home equity, whether through mortgage payments or increasing home values. The percentage you’re able to contribute to the down payment can affect how much your PMI will be—the larger the amount, the lower your PMI. It’s also influenced by factors like credit score, debt-to-income ratio (DTI), and loan-to-value ratio (LTV). The average PMI cost is between 0.5%-1% of the loan amount. Some government loans have their own version of PMI, like a mortgage insurance premium (MIP) for FHA and USDA loans, and a funding fee for VA loans. Be sure to go over the details of the loan’s conditions with your loan originator so you can make more informed decisions.

Home Insurance

Don’t overlook factoring in home insurance when you buy a home. Many lenders require that you have an insurance plan before the sale is finalized. It’s not common to need it before you close so your lender knows it’s protected. In 2021, the average yearly cost for home insurance was $1,312 for $250,000 worth of coverage. Of course, the price will vary depending on your coverage level and the company you choose.

Closing Costs

Going to the closing table is more than just signing documents and taking a commemorative selfie; paying closing costs is also part of sealing the deal. Closing costs cover multiple areas, including title services, real estate attorney fees, origination fees, property taxes, home appraisal, and property inspection. Generally, you can expect closings costs to be 2-5% of your home’s price. Your lender will send a Closing Disclosure a few days before your closing date, so make sure you read it thoroughly and have a secure payment method for the day of. While closing costs are an inevitable part of a home purchase, you can mitigate the upfront cost by rolling them into your mortgage payment or trying to negotiate with the seller to pay a portion of it.

Repairs and Upgrades

When buying home, be sure to acknowledge and be aware of its current state, not just its potential for creating good memories. It’s totally okay to be in love with a property but still have some things you want to change. Consider what immediate adjustments you want to make and how much it would cost to have them done. This is an optional step, but still important to think about in your home search. Gradually building a savings fund just for home repairs is also a smart move to ensure you can afford future home repairs and upgrades.

Buying a home is a significant milestone that will impact your life and your finances. Before you dive headfirst into becoming a homeowner, make sure you’re financially prepared for this investment by creating a realistic budget.

If you have any questions about the home buying process, contact one of our licensed Mortgage Loan Originators. If you are ready to begin t­­he home buying process, click here to get started!

The pre-approval may be issued before or after a home is found. A pre-approval is an initial verification that the buyer has the income and assets to afford a home up to a certain amount. This means we have pulled credit, collected documents, verified assets, submitted the file to processing and underwriting, ordered verification of rent and employment, completed an analysis of credit, debt ratio and assets, and issued the pre-approval. The pre-approval is contingent upon no changes to financials and property approval/appraisal. LTV’s can be as high as 96.5% for FHA loans. FHA minimum FICO score required. Fixed rate loans only. W2 transcript option not permitted.

*100% financing, no down payment is required. The loan amount may not exceed 100% of the appraised value, plus the guarantee fee may be included. Loan is limited to the appraised value without the pool, if applicable. Veterans Affairs loans require a funding fee, which is based on various loan characteristics.

These blogs are for informational purposes only. Make sure you understand the features associated with the loan program you choose, and that it meets your unique financial needs. Subject to Debt-to-Income and Underwriting requirements. This is not a credit decision or a commitment to lend. Eligibility is subject to completion of an application and verification of home ownership, occupancy, title, income, employment, credit, home value, collateral, and underwriting requirements. Not all programs are available in all areas. Offers may vary and are subject to change at any time without notice. Should you have any questions about the information provided, please contact us.