In this post I’ll lay out 7 things to keep in mind when budgeting to buy a house.
Your house is likely to be the largest purchase you ever make. Maybe you’ve been renting all this while (good for you!) or you’ve been living with your parents (also, good for you!) but you find its time to have your own place.
This is a huge step. My wife and I took this step about one year into marriage even while we were dealing with this debt load. Several years later we bought a house with a bit more space. Both transactions required a lot of planning and certainly were stress filled situation. Fortunately, it wasn’t financial stress but just the stress of making such a big decision.
One important thing to understand are the large transactions costs associated with buying or selling a house. When you get to this stage some have a fear of spending money. Thats ok. If anything that just means you are being cautious in such a big moment of your life. There is so much time, energy and focus involved its not something you want to do frequently.
Budgeting to buy a house
I’ve taken a look at my experiences and done some research and have put together a list of 7 things to keep in mind when budgeting to buy a house. In no particular order, here they are.
Choose the right house budget
This may be the biggest decision you make. Its such a balancing act because you want to have a home you can live in for a while but you also don’t want to pay an arm and a leg for something.
My best advice is to plan on staying in the house for 8-10 years. I’ve went in detail on this topic here and here. This will require you to think into the future about what you may need. Honestly I’d think about garage parking, closet space, attic storage space, number of bedrooms, etc.
Really put some thought into this. If you are buying with a significant other make sure you guys compare notes about what you believe is important. Here is my best advice on how to do that. These conversations will certainly take you down the path of what size of family you’d like and where you’d like those kids to go to school.
I’m not going to attempt to put a number to how much house you should buy. There are way too many variables to consider. I will tell you that my most recent home purchase was about 1.5-1.7X our household income when we bought it.
Calculate your monthly mortgage
When budgeting to buy a house actually calculating your mortgage has to be a cornerstone. I’ve wrote extensively on things to take into account when putting together your calculations.
Unfortunately there are multiple numbers to take into account. The first is certainly the cost of the loan. The second is your homeowners insurance and the third big piece is and PMI.
If this is your first home you may be required to include your homeowners insurance bill in with your mortgage. Also, PMI stands for Private Mortgage Insurance. This is an extra cost that is added to your mortgage if you don’t put 20% down. You can read more about PMI here. Which brings me to my next point!
How much of a down payment should you put down
This is the age old question that everyone seems to want an answer too when it comes to budgeting for a house. From my perspective there are only three right answers.
The first right answer is to pay for your house in cash. This is probably not the situation you are in (good for you if it is!) but I do believe that is always an option.
The second possible answer is to put 20% down. The advantage to this is it will avoid the dreaded PMI. FYI you can get rid of the monthly cost of PMI after you’ve paid your mortgage down past that 20% threshold. Here is a deep dive into how to avoid paying PMI altogether.
The third possible answer is to put as close to 0% down as you can. I caution you to only go down this route if you are responsible with your money. Here is an option to explore with the extra cash you have on hand with this strategy.
My logic behind this is that there is no real advantage in putting 13% down (or anything less than 20). That is money that could be tied up in your mortgage that doesn’t gain you anything besides a marginally lower house payment. I’d much rather have that cash in the bank.
Saving for your down payment
This is a difficult one. A down payment for a house can seem like an astronomical amount. If you are scraping by each month putting away thousands of dollars can seem like an impossible task.
Please be patient with yourself. Where you are right now doesn’t dictate where you can go. The first mindset that you need to get into your head is that you may have to sacrifice.
Once you’ve gotten the right mindset you need to do some work to increase the gap between your income and expenses. Really take a hard look at where you could make some permanent cut to your expenses. Alternatively, maybe look at how you could bring in some extra income.
Plan on extra savings
I know what you’re thinking, I have to save even more!?!? Unfortunately, yes you will need to. You can’t save up for a long time and then pour it all into your house.
There are so many things that could happen after you buy a house you’ll need some cash to cover those in case of an emergency. Previously I’ve covered where you can keep your emergency fund.
Also, there will certainly be some costs with renovating and furnishing your new home.Don’t plan on tackling everything at once but it is certainly something that will need some attention.
I remember the first house we bought we had to prioritize what we furnished and what we didn’t. This principle may have been taken to an extreme as I distinctly remember going without an oven for a month or two. Needless to say we relied on our grill during that time!
Get your financial house in order
If you haven’t already, I’d highly recommend starting a budget and tracking your expenses. This is maybe the most important information in your financial world, especially when it comes to budgeting to buy a house.
You may also want to think about paying down debt. Paying down debt will give you a bit more breathing room and increase that ever-important gap between your income and your expenses.
Go talk to your bank
When budgeting for a house this may be one of the most important steps. I’m sure some of you may be intimidated by doing this but I highly recommend it.
Tell them you are starting to save for a house and want to understand the pre-approval process and what types of things the banks will look at to determine your creditworthiness.
Its much better to know all of this early in the process. You want to avoid getting hit with a surprise right when you think you can do some home shopping!
Well there you have it. Budgeting to buy a house can seem like the longest process ever. Keep your head up and know that you can do it. Please plan for your house purchase and don’t walk into this important stage of your life blindly!