When the desire to become a homeowner latches onto your heart, it’s all too easy to lose your mind and ignore your budget.
Even on our most recent adventure—our fifth time around—my husband and I had difficulty keeping our priorities in the forefront.
It becomes even tougher when friends and family members are encouraging you to buy because It’s the same/a little more/a little less than renting! and You won’t be throwing your money away every month!
Whatever the source, that temptation can be hard to resist.
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However, if you are willing to follow a simple formula, you will increase your odds of buying a house you can love and live with.
So what’s the secret to buying a home you can afford?
Live like you already own the house.
Here’s what that looks like:
1. Add up the known expenses for the type and size of home you have in mind.
2. Put these items in your monthly budget, and set the money aside as though you are actually spending it.
3. Live with these finances as part of your life for at least six months.
If you can successfully and comfortably handle the increase in your budget, you’ll be well on your way to buying a home you can afford.
Plus, you will have set aside six months of the increase in expenses, which will add up to a tidy sum!
To know what you’ll want to include, see the list below.
There are several types of expenses you’ll need to cover.
Some are one-time outlays, and others are monthly or otherwise regularly occurring bills.
1. Pre-purchase costs. When your offer is accepted on a house, you will need to have inspections done as part of your due diligence. These can typically cost $300-$900 per property.
2. Down payment. Talk to your bank about what you can expect regarding requirements for a down payment. As an example, our local credit union requires a minimum of 3%. If you are looking at a $150,000 home, that’s $4,500.
3. Closing costs. There are various fees for the buyer in a real estate transaction. Typically, these fees—your closing costs—will range from 3-5% of the cost of the amount you borrow.
4. Mortgage, taxes, house insurance, and PMI. Again, your bank is a terrific resource for estimating mortgage payments. The yearly property taxes can generally be found in the real estate listing. Homeowners insurance can vary tremendously from region to region, so you might want to check with a local insurance agent to see if they can give you a very general idea of what to expect. PMI is the monthly insurance the bank requires on your mortgage until you have paid for at least 20% of the value of your home. Expect to pay anywhere from $35-$70 per $100,000 you borrow. You can subtract what you pay for rent from the total of these four items before adding it to the budget.
5. Utilities. You can call the utility company that services a neighborhood, and ask for the average monthly utility costs for the past year for a particular address. If that isn’t possible, speak to folks you trust to get an idea of what you’ll pay in your area for heat, water and sewer, electricity, and trash disposal. Remember, too, to subtract your current utility costs from this total before adding it to your budget.
6. Appliances, furnishings, and equipment. You’ll probably be surprised at how much it takes to furnish an empty house. Everything from large appliances to installing a new toilet becomes fair game. Even smaller purchases like curtains and bedding can add up pretty quickly, so it’s important they are in the budget. Do a little window shopping, whether online, or in person, to get a feel for the cost of kitchen appliances, furniture, home goods, and equipment, such as lawnmowers.
7. Maintenance. While there are many different variables that will affect how much you’ll need to set aside for repairs and maintenance, setting aside 1%-3% of the cost of your home is a good rule of thumb.
While these figures may seem daunting, they represent a pretty realistic picture of the cost of home ownership.
If going through this exercise reveals you are not financially ready for owning your own home, use this information to create a lifestyle and budget that will take you where you need to be.
That is a far better situation than purchasing your dream house and having it turn into a financial nightmare.
As the Boy Scouts say, “Be prepared!” so when you do buy, you choose a home that comfortably fits your heart and budget.
For a more insight on buying a home, check out these Engaged Marriage posts:
When Should Newlyweds Buy Their First House?
5 Questions to Ask Before Buying a Home
When Should a Couple Rent vs Buy a Home?
Comment: What would you add to this list to help couples buy a home they can truly afford over the long term?
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Awesome post, Kim! I think you nailed it with this checklist of expenses to plan for when considering an “upgrade.”
I would encourage couples to do this BEFORE you find a specific house…otherwise house fever will take over and you’ll justify anything. Don’t ask me how I know! 🙂
Dustin
Thanks Dustin! I think you and I have traveled similar paths. 🙂
Another bit of Dave Ramsey’s wisdom comes to mind about only asking “How much per month?” regarding just the mortgage payment. That thinking leaves out so many of the other expenses that can ultimately lead to a couple losing their home.
Kim,
This is very sound advice. If more couples followed these insights life would be more comfortable for them.
Two other add-ons to consider: 1 – You mention it briefly but everyone should have a written budget so every dollar has a name before the month begins. Many couples we work with have difficulty finding money to accomplish what they want to do every month until we show them precisely how to do an easy, step-by-step workable budget. Usually they find money sifting out through a few holes in their month.
2 – Seek a Realtor who will give you, in advance, the specific estimated closing costs for your area and price range. The bank, as you mentioned, is a good resource but so is a sound real estate professional who will have your interest at heart. This also allows you to interview several Realtor’s before getting into the “buying frenzy”.
Great thoughts, Kim!
— Jerry Stumpf – Romance and Marriage Coach
Great points, Jerry! Learning how to budget was a lifesaver for my husband and I. It’s scary to look back and realize how close we skated to the edge of major financial difficulties, especially in buying one home in particular.
Realtors can be great sources of other information, too, such neighborhood histories and values. Thanks for adding to the conversation!
Great list! With each of our two home purchases, I felt like we ended up spending close to $5000 at the local home improvement store (probably with some curtains, etc mixed in). With #2 (a 25 year old home, with original kitchen, bath, and flooring), we’ve been here about a 18 months and have easily spent $25000 in upgrades and repairs, but we were expecting every bit before we put an offer in, just not all of it so quickly (new flooring, fence, new HVAC, updated half bath, mostly remodeled master bath, which all add up quickly). Another full bath and the kitchen to go, but those may take a while to save up for, and they’re functional as is.
Wow, Nikki-that’s quite a list! Thanks for sharing those figures, as it can be very eye-opening what it can cost to maintain or repair/upgrade. Did you do any of the work yourselves, or did you hire it all out?
Our latest home is about the same age as your latest house. It, too, is dated, but we are doing simple and inexpensive updates for the time being. You can see our kitchen facelift project here, along with the dividends that such a project will pay: http://www.toodarnhappy.com/2014/06/02/thrifty-diy-investment-pays-dividends/
Things have definitely been busy here! We hired most of it out, but did a lot of shopping around. We hired a big box store to replace the carpet (before we moved in – sellers had cats, we are all allergic), a company to install the fence (our neighbors did theirs at the same time, so we split the middle part and got a better price doing two at once), a contractor friend to do the laminate, wood stairs, and most of the master bath (demo, drywall, plumbing, and tile, complete with removing a shower stall and jacuzzi tub, and installing a new, tiled, double shower), while we did wallpaper removal and paint (mostly, the paint is almost done, and we started the bathroom in November) and plan to paint the vanity and replace the countertop, a family friend did the HVAC (they have a third generation mechanical business our family has been working with since before the business was a full time venture for the first generation), and we did the half bath (except floors, which were part of the laminate) ourselves (wallpaper, drywall repair, paint, cabinet, and vanity). It definitely pays to know people, and to be flexible about the timetable. We decided with this house to just do the renovations we want the first time rather than doing fixes and doing them again later, so the floors and master bath definitely cost more than they could have, but they’re exactly what we want them to be (aside from the master being not quite finished). I’m not looking forward to the next bath, as its more wallpaper to deal with (as is the kitchen).
I’m get tired just reading your list-wow! :-O
I agree-flexibility is key, as is knowing folks. We found that having a punch list is helpful, too. While punch lists are normally a list of tasks needed to finish up a construction project, we use them as mini-goals on our way to bringing the house ever closer to what we want it to do and be.
Good luck on your projects!