How to budget for buying your first home

By identifying your budget before you start home shopping, you’ll understand your options, making your home search more focused. Budgeting not only saves time but also directs your attention to properties within your price range, so you’ll be less likely to overextend yourself financially.

There’s a general rule of thumb that you shouldn’t spend more than 28 percent of your gross monthly income on housing expenses, including your monthly mortgage payment, property taxes, homeowners’ insurance and HOA fees, if applicable. However, everyone’s financial situation is different.

There are two essential things to know when preparing a budget to buy a house—what comes in and what goes out. The “what comes in” is your income. Gross monthly income is one of the primary ways to determine your maximum home loan amount. Other forms of earnings may be eligible income sources for a mortgage, not just your wages and salary. Your local loan officer can explain what income sources may be acceptable based on your mortgage type.

“What goes out” are your expenses, which might include groceries, auto and student loans, entertainment and the minimum payment amounts for your credit cards.

To create a budget specifically aimed at determining the amount you have available for a future mortgage payment, follow these five steps:

1. Calculate your income: Start by writing down all of the money you receive regularly, including the items on this eligible income list.
2. Track expenses: Next, record all of your spending for a month, including your debt payments.
3. Deduct expenses from income: Subtract your total monthly expenses from your total income to determine the amount you have available for a future mortgage payment.
4. Assess your financial goals: Use the remaining amount to gauge what mortgage payment is within your reach, ensuring it’s within your financial goals and allows for savings and emergency funds.
5. Identify potential savings: Are there areas in which you can cut back or reduce spending to increase your savings?

When budgeting for a mortgage payment, consider not just the mortgage itself but also additional costs like property taxes, insurance, and potential maintenance expenses associated with homeownership. The number you get from the pre-approval process tells you the maximum payment amount you can expect to borrow. To better understand how that translates to potential homes in your budget, it’s helpful to consider what else goes into buying a home. Be better prepared for homeownership by adding these expenses to your budget for buying a home.

1. Account for ongoing homeownership

2. Ask about HOA fees

3. Breakdown your monthly mortgage paymen

4. Calculate your closing costs

5. Manage moving expenses

A down payment is a portion of your home’s purchase price that you pay upfront. The amount of your down payment will vary depending on your home’s appraisal price, the type of loan and your credit history. There are several home loans with low or no down payment options available.

While a larger down payment helps lower your borrowing costs and monthly payments, putting less down can have advantages. The main benefit is becoming a homeowner sooner, so you can start building home equity instead of paying rent.

Use our mortgage payment calculator to see how your total payment results change based on your down payment amount. Then, choose the right amount based on your financial situation.