10 Things Every Homebuyer Must Plan for in Their Home-Buying Budget
Purchasing a home is one of the most exciting experiences in a person’s life. But making the transition to homeownership can also be stressful. While a home is a valuable and wise investment, the process of finding a home loan, saving for the purchasing costs, and home shopping can feel overwhelming — especially the saving part. But it doesn’t have to be.
It’s imperative to have a home-buying budget and know what costs will factor into your home’s purchase. While every homebuyer’s experience is different, here are 10 items you need to budget for in home buying.
1. Down Payment
Conventional mortgages require down payments ranging from 5% to 20% of a home’s price. This can be thousands to tens of thousands of dollars. A down payment is a significant amount of money, but there are other options. FHA loans can run as low as 3.5% for a down payment, reducing the up-front amount significantly.
The great news is that down payments provide instant home equity. And the higher your down payment, the lower your monthly payments and private mortgage insurance (which would be obsolete at a 20% or more down payment) will be.
2. Closing Costs
Closing costs are one-time charges surrounding the sale of a home. They include costs like title transfer, recording fees, surveys, pre-paid taxes and insurance, and inspections. Depending on loan type and down payment amount, buyers can ask sellers to pay partial or full closing, but this may be a negotiation area that could make or break the deal on the home you love.
3. Paying Off Debt
A home loan raises your debt immensely, and debt plays heavily into two home loan related issues: your debt to income ratio (DTI) and your credit score. If your DTI is too high, you cannot qualify for certain types of loans. If your DTI is 50% or more, steer clear of a home loan altogether. Most borrowers are unsuccessful at saving and meeting all of their needs at this high of a rate.
On the same note, too low of a credit score can prevent you from obtaining a loan, but it also affects your interest rate. The higher your credit score, the better interest rate you will receive on a loan. The more you pay off debt, the higher your credit and the lower your DTI will be.
4. Property Taxes
Owning your own home means paying taxes on your property. This is a yearly amount that will be divided evenly among your twelve monthly payments. Property taxes will vary from district to district and will be based on the size of your home and property.
You can easily prepare for property taxes and save money all at the same time by practicing making your property tax payments. If you are currently renting, simply research your desired area’s annual property taxes, divide that number by 12, and begin making that payment into your savings account. Property taxes won’t ever be an inconvenience if you are already learning to pay them. And this adds to the amount you save for tips 1 and 2.
5. Homeowner’s Insurance
If you are currently renting, you hopefully have renter’s insurance, but homeowner’s insurance is still a different ball game. When you purchase a home via a loan, insurance is a requirement. Not all renters are required to purchase insurance and can forget to factor this cost into their home budget, so plan accordingly.
6. Emergency Fund
Becoming a homeowner means taking on a whole new world of responsibility. If your roof needs to be replaced, you are responsible. If your HVAC goes out, you are responsible. And if you do not have any money set aside, these situations can become a nightmare — but not with an emergency fund. A prepared homebuyer is a happy homeowner.
7. Updates and Repairs
The home you move into may be in need of minor repairs or won’t completely match your taste. And with the amount of money you spent getting into the home, you will likely not have money for these updates unless you plan ahead.
You may already own appliances. But many first-time homebuyers should prepare a budget for needed appliances. For a home to qualify for a loan, it must have a stove/oven, but there is no requirement on refrigerators or washer and dryers. Set aside money specifically for the remaining appliances needed so your home can be fully functional when you move in.
A home purchase is typically an upgrade in square footage from an apartment. Create a budget that will help fill the empty spaces in your home. It’s perfectly fine to take your time finding the furniture you love, but there may be some necessary items you didn’t have prior to homeownership.
10. The Rest of Your Life
Budgeting for your life is the most important item on this list. While the above points will get you into a home, a lifelong budget will keep you in your home and keep you happy. Don’t get so eager to become a homeowner that you buy too much house. You still have to live your life. Calculate what you can afford by breaking down your current expenses and factoring in your best estimates for mortgage, taxes, and insurance.
Enjoy the Home Buying Experience
Don’t let the expenses of home buying stress you out. A carefully planned budget will put you on the right track, and an experienced realtor will get you a great deal. Our McGraw team has the resources and knowledge to help you get into the home you love while helping guide you through the buying process. We want you to feel comfortable and excited when you finally sign for your new home.