When purchasing a home, a crucial step you want to consider is the budgeting process. Preparing your budget for buying a house ahead of time can alleviate feeling overwhelmed and stressed down the road. We’ve put together a helpful budgeting guide so you know what to expect and how to prepare when purchasing your dream home.
How Much Can You Afford?
Before you scroll through Zillow looking for your new home, sit down with a notebook and a spreadsheet of your current finances. The first and most important step is to assess your finances, debt, and income of yourself and a significant other if they are purchasing the home with you. The bank will require proof of steady income when applying for a loan, so have recent paycheck stubs and your most recent W-2 form handy. In addition, it is helpful to take a peek at your credit score and your debt-to-income ratio. These essential factors will determine your probability of an approved loan and a monthly payment rate. In some cases, it may be helpful to talk to the bank beforehand and get pre-approved for a loan. Not only will that let you know how much you can spend on a home, but it will also speed up the process once you find a house to put an offer on.
Down Payment & Upfront Costs of Buying a House
The most considerable upfront cost of buying a home is the down payment. The percentage of the total home price you allocate for a down payment will determine the type of mortgage you qualify for and your home loan’s general terms and conditions. As a result, the down payment percentage will vary depending on the type of loan you seek or qualify for. In 2022, the median national down payment rate was 13%, according to the National Association of Realtors.
In addition to budgeting for down payment costs, expect to budget for inspections and appraisals. While the cost of hiring an inspector or appraiser varies given your geographical location, plan to budget for $300-$400 for each professional.
Closing Costs for the Buyer
If you’re not well versed or experienced in the home buying process, closing fees can come as an unexpected cost of buying a home. Examples of closing costs can include:
- Title fees
- Lender fees
- Application fees
- Credit Reporting fees
- Title insurance
- Lawyer fees
- Notary fees
- HOA fees
Closing costs will vary by state. Here in Texas, expect to budget for approximately $3700 for closing costs.
Maintenance Budgets & Emergency Funds
There are two components to the home-buying budget. The first is for the initial down payment, mortgage rate, and closing costs. The second component is just as important, which includes setting aside money for emergency and maintenance funds.
You don’t want to put all your savings towards a down payment and not have any money left once you receive the keys. So while you are allocating reserves toward your down payment, it is just as important to set aside a small percentage towards a house emergency fund.
An emergency fund is considered a safety net if you experience an unfortunate circumstance that prohibits your monthly income, such as losing a job or an unexpected hospital visit. It is recommended to save 3 to 6 months of your personal expenses in an emergency fund to fall back on in case something happens. In addition to budgeting for an emergency, it is recommended to budget for future home maintenance and upkeep costs.
Annual Costs of Owning a Home
After you’ve signed your name, received your keys, and spent time celebrating the excitement of your new home, the budgeting work, unfortunately, doesn’t end. After you’ve settled in, it’s time to start crunching the numbers to make room for the annual expenses of owning a home. Property taxes and homeowners insurance are just two examples of yearly homeowner expenses.
Property taxes are likely the highest long-term associated cost of buying your house. Two main factors determine your annual property taxes; the assessed value of your property and the local county or city levy. The housing market has seen growth nationwide in recent years. As a result, property taxes and valuations have grown in nearly every state across the U.S. In Travis County, which encompasses the capital city of Austin, the countywide property tax rate is 1.95%. There will be additional tax rates based on the city and school district levies in which you purchase a home.
Homeowners insurance can be a requirement from your mortgage lender. Typically homeowners insurance in Texas includes:
Personal property coverage
Other structure coverage outside your house includes a garage, fence, storage shed, etc.
Personal liability coverage
Medical payments coverage
Loss of use coverage
The monthly or annual premium will depend on the price of your home and your geographical region. However, the average annual cost of Texas homeowners insurance is approximately $2,000 on a $250,000 home.