Budgeting for a Home Purchase

Do your Homework:

Budgeting for a home purchase requires calculating your monthly income and expenses to determine how much can you comfortably afford.  You will need to assess your savings to ensure you have enough to cover your down payment and closing costs.

Calculate the Cost of Homeownership to decide if it is right for you:

1. 1. Add up all the income you bring in each month. If you take home $5,000 and your spouse takes home $4,000 each month. Your total monthly net pay would be $9,000.
   2. Multiply your monthly take-home pay by 25% to get a COMFORTABLE mortgage payment amount. If you take home $9,000 a month, your monthly house payment should be no more than $2,250. Keep in mind, many mortgages will let you take out loans upwards of 40%, but YOU are the decision maker here, do you want to struggle to make your payments?
   3. Down Payment. Consider saving for a down payment of 20% because you’ll avoid private mortgage insurance (PMI). PMI is an extra cost added to your monthly mortgage payment, and it doesn’t go toward paying off your mortgage balance. PMI typically costs between 0.41% to 2.25% of the entire loan amount on an annual basis (depending on your credit score, loan-to-value (LTV) ratio, and debt-to-income (DTI) ratio). If 20% is out of reach make sure to ask how to get it taken off your loan when you reach 20%!

***Consider down payment assistance grants, gifts from family, and government programs.

Loan Amount: Your loan amount will be the cost of the home you buy minus your down payment. Here is a table to give you a better idea:

Closing Costs: When you close on a house you must pay for expenses like appraisal fees, home inspections, title insurance, lien searches, surveys and lenders fees. You’ll also need to cover property taxes and homeowner’s insurance for the rest of the Lenders call these prepaid items. Your real estate agent and lender will give you a detailed list of these costs before your closing day. On average, you’ll pay 3–4% of the purchase price of your home in closing fees. For a $300,000 home, that’s another $9,000–$12,000 you’ll need to save on top of your down payment.

Ask your agent and lender about closing cost credits from the seller, lender, and government programs.

Bottom line: Preparedness is key. If you don’t have enough money saved for these upfront costs, you’ll either need to hold off on your home purchase or aim a little lower with your price range. Whatever you do, don’t let the closing costs keep you from making the biggest down payment possible. Research, ask, and take advantage of all your options.

Once you are comfortable with your budgeting for a home purchase, shop around lenders to get pre-approved for a mortgage.