How to budget for a house: A home buyer's guide

The home buying process can be exciting. Going house hunting and attending open houses can understandably get you pumped about the potential life changes ahead. But, in addition to finding a house with your desired square footage and number of bedrooms, you’ll need to find one you can afford. Knowing what monthly mortgage payment you can manage requires having a budget in place.

Let’s take a look at how to approach creating a house budget that will work for you.

How to budget for a home

A lot goes into budgeting for a home, and it’s understandable that you may not know where to start – especially if you’re a first-time home buyer. Let’s review the steps to budgeting for a house.

1. Know your gross monthly income

Before you can begin determining how much house you can afford, you’ll need to take an honest look at your monthly income and spending habits. Your gross income is the total amount of money you earn before any deductions are taken out, such as taxes, retirement contributions or health insurance premiums. Your gross income includes wages, salaries, bonuses and any other income streams you may have. Understanding this figure provides the foundation for determining how much house you can afford without overstressing your finances.

2. Itemize your monthly expenses

Once you've identified your gross monthly income, the next step is itemizing and categorizing your monthly expenses. Categorizing your spending by fixed and variable expenses helps pinpoint areas where you may be able to cut back, while also clarifying the portion of your income that can be put towards a down payment and future mortgage payments. For example, groceries are a variable expense, and your spending in that category can sometimes be reduced through more careful meal planning. However, you likely won’t want to make a house budget that will require you to cut back too far, especially in such an essential category.

Don’t forget to include expenses that occur less frequently than monthly, such as vehicle maintenance or annual memberships. Work these into your home buying budget by averaging their cost over 12 months.

It may be helpful to break down your recurring monthly expenses into categories, evaluating which are a necessity and which you could do without. That way, you’ll know if there's any wiggle room in your budget.

3. Budget for your down payment

Another important number to know when you buy a home is the amount of money you plan to put down. Knowing how much you can afford as a down payment will help you calculate your potential loan principal for any house you’re thinking of buying.

The exact amount you’ll need to put down depends on factors like your lender and the type of loan. This amount can sometimes be as high as 20% of the sale price, but most lenders won’t require this much. You may be able to buy a home with as little as 3% down for a conventional loan, 3.5% down for an FHA loan and zero down for a VA loan.

It’s important to note that there are benefits of a larger down payment if you can afford to make one. For example, you may get a better interest rate and avoid private mortgage insurance if you can put down the full 20%.

4. Determine how much house you can afford

Once you know how much income you have to work with and the amount you plan to put down on a home, you can start determining how much you can afford to spend on housing each month. One common rule that many home buyers consider when budgeting for a house is the 28% rule, which states that you should spend no more than 28% of your gross income on housing expenses. Keep in mind that while the 28% rule can be a great starting point, it’s not a hard and fast rule that will work for everyone.

Let’s take a look at some components that may need to be included in your housing budget.

• Mortgage principal and interest: The biggest part of your monthly mortgage payment is your principal and interest. Your principal is the amount you owe on your mortgage, while your interest is the percentage of your loan that your lender charges in exchange for you borrowing the money. A mortgage calculator can help you estimate your monthly principal and interest payment, but you’ll need to input key pieces of information like the home price, down payment, interest rate and loan term.
• Homeowners insurance: When you buy a home, you’ll also need to factor in the cost of homeowners insurance, which will protect you in the case of an accident or natural disaster.
• Private mortgage insurance: Depending on the type of mortgage you’re getting and the size of your down payment, you may need to factor in the cost of private mortgage insurance (PMI).
• Property taxes: Another factor you’ll need to consider when buying a home is the cost of your annual property taxes. Some lenders factor this into your monthly mortgage payment, holding the money in an escrow account until the bill is due and then paying it on your behalf.
• Homeowners association fees: Depending on where your new home is located, you may also need to pay annual or monthly homeowners association (HOA)

5. Factor in closing costs

When budgeting for a home, you’ll also need to make sure you can cover the closing costs. These include any fees and additional costs (such as the appraisal) that are associated with the home buying process. Typically, you can expect to pay 3% – 6% of the total loan amount in closing costs. In some cases, you may be able to negotiate closing costs with the seller, but your ability to do so will probably depend largely on whether it’s a buyer’s market or a seller’s market when you purchase your home.

6. Plan for home maintenance

Your down payment, monthly mortgage payment and closing costs aren’t the only costs you’ll need to consider when budgeting for a house. You’ll also want to leave room in your monthly budget for home maintenance costs.

Every item in the following list might not apply to your specific situation, but you’ll get an idea of the various maintenance costs you may have to budget for when buying a home.

• Lawn care
• Pool maintenance
• Pest control
• Maintenance on appliances
• Exterior maintenance
• Minor interior repairs

Along with adding these maintenance costs to your monthly budget, it may be a good idea to establish an emergency fund for other house-related costs that could pop up. Larger costs like a new water heater aren’t required often, but when they are, they have the potential to cause financial stress if you don’t have some emergency money tucked away.

Don’t fall into the ‘house poor’ trap

While it can be tempting to buy the most expensive house that can fit into your budget, it’s important to avoid spending so much on your home that you become house poor. This term is used to describe people who spend the majority of their income on their mortgage payments, leaving little room in the budget for other purchases that make life more enjoyable. Do your best to live within your means and make decisions that will help set you up for financial success.

How to budget for a house FAQs

Here are a few frequently asked questions and answers worth keeping in mind as you go through the home budgeting process.

What should I do if I can’t afford to buy a house?

If you determine you don’t have the budget to buy a house, you can take a number of steps to improve your financial situation and make your dream of homeownership more affordable in the future. Work on improving your debt-to-income ratio (DTI) and see if there are places you can cut costs to make more room in your monthly budget. You may also have grants and assistance programs available to you to help with the initial costs of buying a house.

What’s the 50/30/20 rule?

The 50/30/20 rule is another guideline that is sometimes used when creating a budget. The rule states you should put 50% of your net income toward necessities, 30% toward your wants and the remaining 20% toward paying off debt and building your savings.

How much should I put down on a house?

The amount you should put toward a down payment depends on your financial circumstances. Consider factors like personal affordability and whether you want to avoid paying private mortgage insurance when you’re deciding on the size of your down payment.

The bottom line

Establishing a budget is an important step in the home buying process. You’ll need to consider a number of factors, including your monthly income, your regular expenses, your monthly mortgage payment and the cost of ongoing maintenance once you’ve closed on your home. Having a well-thought-out budget in place as you search for the perfect home can help you know with confidence that you’re choosing a home you can afford.

Ready to begin the home buying process? Start your mortgage application online today with Rocket Mortgage^®.