How to Set Your Home-Buying Budget

a family enjoying time together in their living room

Buying a home can be exciting… but it’s also intimidating. 

Purchasing real estate marks a major accomplishment in your life. But the median cost for a home across the U.S. is $284,600 – so for many, buying a home is the most expensive transaction made in an entire lifetime.

Buying a home is a multi-step process that requires time, money, and of course, strategy. And if you’re unfamiliar with that process, you won’t know what you need to pay for. It’s not uncommon for buyers to be taken off guard by all of the hidden expenses that arise when they’re purchasing a home. 

Walking into a deal of this magnitude unprepared can mean disaster. Nothing is worse than starting off on the wrong foot. Buyers should always look to streamline the home buying process by performing due diligence on the ins and outs of buying a home. 

One of the most important elements of preparing for a home purchase is setting a budget. Nothing fortifies your position as a buyer more than financial security. Buyers should set themselves up for success before the shopping even starts by working on their finances.

Whether you’re seasoned in real estate or looking for first-time homebuyer tips, this guide will serve as a valuable resource to streamline your experience. 

The Importance of a Home-Buying Budget 

The very first thing anyone approaching homeownership should do is set a strong budget. 

For some, it seems smarter to hit the ground running by jumping into a home search. But, seasoned buyers know that the market search should never be shaped around one appealing listing – the entire process needs to be grounded on your financial situation. After all, available homes can get swept off the market before you even have a chance to dip your toes in the process. 

Budgeting Benefits 

Buyers should never run after a listing before they’re clear about what they’re able to spend. As with any big process, getting organized is the first step. Without a budget, you’ll be navigating the housing market blindly. First-time buyers in particular need to have a clear foundation to operate from. 

It’s important to remember that the price tag on a home doesn’t represent the amount of money required to purchase the home. On top of the seller’s initial listing price, buyers need to account for the expenses associated with the real estate transaction itself. Depending on the home you’re buying, that could mean adding an additional several thousand dollars to your total bill. 

When you start shopping with a budget in mind, the home search process is always geared towards your situation. You won’t be wasting time scrolling through endless listings, many of which aren’t even in your range. Instead, you can spend your time and effort wisely – ultimately helping you find the perfect home. 

Factor These 7 Expenses Into Your Home-Buying Budget 

Shop smart by starting with a realistic budget. 

When setting a home-buying budget, the first thing buyers need to do is understand what expenses are involved in purchasing a home. Here are some of the biggest expenses that you’ll need to budget for: 

The Initial Down Payment

First things first, buyers will need to be prepared for the down payment. 

A great goal to strive for is to be able to pay off between 10% and 20% of your new home’s value. For example, a common down payment on a $150,000 home would range between $15,000 and $30,000. Even if you plan to finance your down payment, you’ll need to keep it in mind. 

The Monthly Mortgage

Once you finalize your loan, those monthly payments will start rolling in. Homebuyers need to budget for their new mortgage bill. Remember to calculate the principal plus the interest. 

Even if you haven’t yet finalized your mortgage loan, you can still examine your finances to see how much you’ll be able to pay every month. First-time buyers can use a reputable online mortgage calculator to gauge how much they can afford. 

A quick rule of thumb – money advisers often recommend spending between 29% and 41% of your monthly gross income on housing, depending on other debts and financial obligations. 

Closing Costs

Since closing costs come at the end of the deal, they’re easy to overlook. Don’t let yourself be caught off guard by closing costs – which typically range between 2% and 5% of the property’s value. Prepare for a stress-free closing by keeping these hidden costs in mind. 

Inspections

Just because a home looks free of imperfections on the surface doesn’t mean it’s not hiding any risky features. Buyers need to pay for property inspections to make sure the home they’re buying is actually worth the cost. Inspections also alert buyers to any troublesome areas that may cause issues later. 

According to the U.S. Department of Housing and Urban Development, your typical home inspection will cost anywhere from $300 to $500 depending on the size of your home. If you’re planning on buying a particularly large home, this number could be even higher.

Bidding Money 

Earnest money is what a buyer gives a seller to support their initial offer. When competition between buyers gets tough, a bidding war can ensue. In this case, buyers will want to have saved enough to cover their earnest money without having to dip into other areas of their budget. 

The amount you’ll need for an earnest money deposit will vary, but it’s usually about 1% to 5% of a home's purchase price.

Don’t Forget About Moving Costs 

No matter where you’re coming from, moving is never free. Whether you’re moving into a house that’s down the block or across the country, transportation costs will rack up a bill. Be sure to allot the necessary funds to cover moving expenses post-closing.

The cost of moving will vary depending on several factors like how far you’re moving and how much you’ll need to transport. Get quotes from a few different moving companies to find out how much you’ll need to set aside.

Design Considerations 

Beyond renovations projects, home buyers also need to factor in the money they’ll be spending to get their new homes up and running. Interior designs, home decor, and furniture costs all deserve a place on your home-buying budget. Think about what you might need to buy in the first few months of living in your new home so you’re not surprised after you’ve moved in.

Adding these 7 expenses into your home-buying budget will ensure that you’re prepared to tackle all the obstacles in your way. 

5 First-Time Home Buyer Tips

Now that aspiring buyers have an idea of what expenses they’ll need to cover when buying a new home, let’s review some of HomeFinder’s expert tips for shaping personalized budgets. 

“Affordable” is Relative

Affordability is all relative to your situation. Aside from the home, most people have to factor other debts into their household budgets. Car payments, student loans, and other regular expenses need to be reflected within your home buying budget. 

You’ll need to spend some time looking at your own personal financial circumstances to find out what “affordable” means for you.

Remember to Account for Sudden Changes

Financial situations can change quickly. In the blink of an eye, your income can change or you can encounter emergency expenses. Giving yourself the room to save for unexpected changes in income is a best-practice for anyone buying a home for the first time. 

Plan With the Future in Mind 

Always look beyond the right-now moment when planning for your financial future. Take into account your future plans, both professional and personal, along with your savings goals. 

Consider Rent-to-Own Solutions 

If you’re struggling with the financial responsibilities associated with traditional home-buying methods, rent-to-own may be for you

Find Your Next Home 

When you’re ready to start shopping for your new home, visit HomeFinder’s listing portal. We have millions of real estate listings waiting for you, including rent-to-own properties, located across the country. 

Questions about buying a home?

Get Connected to a Local Specialist Immediately.

Samantha Wilson

OpCity

Questions about buying a home?

Get Connected to a Local Specialist Immediately.

Contact a Local Specialist today!