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How To Create A Real Budget When Buying A Home

Setting a realistic budget is essential to financially preparing for homeownership. It begins by evaluating your current budget and your level of comfort with your monthly outlay. It concludes with a detailed expense list of the costs to buy, furnish and maintain your new home.

Most budgeting guidance details the costs required to complete the purchase –

  • The required down payment – This is often the most challenging part for first-time buyers. Down payments can be as low as 3% (of the home’s purchase price) – if the borrower’s situation and credit profile permits. But remember, even 3% can be a large chunk of money ($9,000) when it is based on a purchase price of $300,000, a home priced just slightly above the 2021 average home price of $287,148.
  • The closing costs – Depending on your location and loan amount, approximate closing costs vary from 2% to 5%. For 2020, ClosingCorp calculated the national average of closings costs for 3.4 million single-family home purchases to be about $6,000 – including taxes.
  • Reserves/escrows – A lender may require you to set up an escrow account (i.e., prepaying upcoming taxes & insurance premiums). Additionally, lenders also require (and it is a smart idea) to have reserves (extra funds) equal to at least six months of your anticipated monthly PITI – Principal, Interest Taxes & Insurance.

The above-noted expenses are the most common items referenced when budgeting for a home purchase. However, the only thing you receive at the closing table is a set of keys and the title to the property. In reality, the new homeowner must be ready/able to pay for services and items – to make their actual move –

  • Moving Expenses – As one would expect, the average cost to move in-state ($2,300) is significantly less than an interstate move ($4,300) – for a household move of 7,400 lbs.
  • Required Updates & Maintenance – New homeowners may need to repaint the home, upgrade screens, add new flooring/carpeting, upgrade the washer/dryer, etc.
  • Furnishings – If your new home is larger than your old one, you will need new furnishings.

It is also essential to understand the ongoing costs as the property owner –

  • Monthly mortgage payments typically include principal, interest, taxes & insurance, and mortgage insurance if applicable. Condominium and PUD unit owners will also have monthly homeowners’ fees for the project’s common areas upkeep.
  • Preventative/Routine Maintenance – from landscaping to snow removal.
  • Utilities – electricity, gas, water, internet, cable, home security, phone, etc.

Be Realistic

Take the time to differentiate between your new home’s needs and which of your ‘needs’ are really ‘wants.’ This will allow you to compromise for the right reasons. Unless your budget is limitless, there is no such thing as the perfect home.

Getting pre-qualified is a smart and simple way to define a budget starting point. A mortgage consultant can help you refine your budgetary thinking and show you how you may be able to afford more than you think.

But any way you slice it, real estate is a long-term game that you can begin with a bit of short-term budget-conscious efforts.