Setting a Regret-Free Home Buying Budget

Just because you can, doesn’t mean you should—that about sums up the home buying budget cautionary tale perfectly. In other words, just because you can buy a house in a certain price range, doesn’t mean it’s the right financial decision for you.

Setting up a budget before you start shopping can help you feel more confident in your search and help you live more comfortably after you seal the deal. But you’ll also want to understand the true cost better, as well. Think about two categories: how much can I afford and how much does it really cost.

How much house can you afford?

Yes, there is a magic number: 28%
A good place to start when calculating your home buying budget is with the 28% rule—keep your mortgage under 28% of your gross monthly income.

Another tool—one used by lenders to determine eligibility for a mortgage—is your debt-to-income ratio. Here’s how to find yours: Let’s say your monthly mortgage payment is $1,000 and your other expenses are $1,000 for a total of monthly financial obligations of $2,000. If you have a gross monthly income of $6,000, your debt-to-income ratio would be 33%. Lower = better.

How much does the house really cost?

The upside to a bigger down payment
Making a larger down payment has lots of financial perks, including a better interest rate, no requirement to purchase private mortgage insurance if down payment is at least 20% of the home’s value, lower monthly payments and more equity in your home starting on Day 1. Using our Mortgage Calculator can show you the differences.

Include all the ingredients of a mortgage
Each month, you’ll need to cover all the different costs that go into a mortgage payment. Most folks know principal, which is the amount you owe, and interest, which is what the lender charges you to lend you the money. But wait, there’s more! These are the most common:

Property taxes: You contribute about one-twelfth of your annual tax bill with each mortgage payment.
Homeowners insurance: As with property taxes, you contribute roughly one-twelfth of your annual premium each month with your mortgage payment.
Mortgage insurance: If your down payment is less than 20% of the home’s purchase price, you’ll more than likely need to pay mortgage insurance.
And don’t forget HOA: If you belong to a homeowners’ association, the dues are usually billed directly. So it’s not part of the mortgage per se, but you’ll want to make sure that number gets captured.

Other expenses to think about: Bigger homes need more furniture, more heating, more cooling (you get the picture) so think about size. Nearly all homes need some work, but some homes need lots of work, so pay close attention to your home inspection. And take a peek at the utility bills for properties you’re serious about to avoid surprises.