How to Shop for a Home Within Your Budget

Ask any experienced homeowner and they’ll tell you that the actual cost of home ownership goes far beyond monthly mortgage payments. Many fail to consider additional expenses that end up being a substantial part of the final budget. Read more about the full scope of costs associated with home ownership and learn how some prudent financial pre-planning can help save you from overextending your home-buying budget.

Home Ownership Costs to Consider

Taking a hard look at how much you can afford to spend on a home helps set realistic boundaries before beginning your search. The real cost of owning a home exceeds the total monthly payments you make to cover the principal loan amount, loan interest, property taxes and insurance. When assessing the total cost of home ownership, you’ll need to plan for additional expenses like:

• Maintenance and repair costs: Unlike renting, where landlords bear responsibility for appliance repairs, leaky faucets and more, as a homeowner, you are entirely on the hook to cover these costs. Most homeowners should budget between 1-2 percent of the purchase price of a home annually to cover these costs, according to the Washington Post. Therefore, a $250,000 home will likely require $2,500 to $5,000 in maintenance and repairs each year, or $200-$400 monthly.
• Homeowners association fees: In addition to maintenance costs, many neighborhoods and housing developments charge homeowners association fees to cover maintenance costs of communal areas, insurance costs and more. These fees vary widely based on location, but average between $200-$300 according to Realtor.com each month depending on location and amenities.
• Lawn care: Maintaining your lawn, shrubs and trees not only keeps your property beautiful but also helps protect the exterior of your home. Hiring a landscaper costs an average of $100-$400 each month depending on the size of your lawn. You may opt to do your own mowing, weed-eating and edging, but you will need to invest in lawn care equipment.
• Initial move-in costs: Moving into your new home will also require additional expenses which you need to factor into your budget. These may include hiring a moving company, initial cleaning costs, decorations and furnishing to personalize your home, initial maintenance repairs and more.
• Utilities: According to a recent Department of Energy (DOE) study, U.S. households now spend an average of $2,200 on water, electricity, gas, trash and recycling costs annually. As a renter, you may have had some of these costs covered in your monthly rent. As a homeowner, these costs are entirely up to you to pay. 

Your Current Financial Situation’s Impact on Your Home-Shopping Budget

In addition to understanding the full range of expenses you’ll be responsible for as a homeowner, it helps to take a quick inventory of your current financial health when calculating your home-buying budget. The factors below not only help you set limits on your budget, but may also impact your ability to secure a mortgage loan from a lender. Examine your current financial health by considering:

• Savings account balances: Are the balances in your savings accounts sufficient to cover around 20 percent of your home’s estimated purchase price? Securing a loan on a $250,000 home for example, may require an initial down payment of $50,000 (which does not include closing costs). If you cannot come up with this down payment, you’ll likely pay private mortgage insurance (PMI) which helps protect the lender if you stop making payments, or default, on your mortgage. This cost is typically between 0.5 to 1 percent of the total loan amount.
• Credit report and credit score: Your free annual credit report, and associated credit score, helps a lender quickly determine the risk associated with lending you money. Good credit, typically defined by a credit score of 700 or higher, may even qualify you for lower interest rates on a mortgage. Meticulously reviewing your credit report helps you catch and address accounting errors early to prevent hold-ups during later stages of the home buying process.
• Debt: Be sure to add up your balances and monthly payments for all student loans, auto loans, credit card payments and more. These financial obligations will help you further refine how much of your budget you can apportion to your home buying expenses.

Conduct a Trial Run Before Finalizing Your Home-Buying Budget

Another great way to help set a realistic home-buying budget is to simulate the process with a trial run. This exercise is useful to determine if your home buying budget is realistic for your needs.

Begin by accessing a comprehensive home mortgage calculator and input estimated values for:

• Estimated loan amount
• Down payment
• Expected interest rate
• Loan repayment term (typically 15 or 30 years)
• Property taxes and more

Next, add these costs to a spreadsheet covering your current monthly obligations and additional monthly homeownership costs covered above. You’ll also want to ensure you build space in your budget to help cover home repairs or other emergency situations. This financial cushion, or rainy day fund, could include your savings account, a home equity line of credit or other source of easily accessible money to help cover unexpected situations.

Continue to revise these numbers until you can bring your home-buying budget into an area which is realistic for your financial situation. Use this trial run to avoid placing yourself in uncomfortable financial territory where you might not be able to save for the future, or handle unexpected emergencies.