How to Budget Smartly for Your First Home Purchase

written by

Jim Mucci

posted on

December 15, 2024

Buying your first home is a big step! You need to save up money first. Most people save between 3.5% to 20% of the home's price for a down payment. You also need to save 2-5% more for closing costs.

Look at how much money you make each month. Then look at what you spend. Your house payment should not be more than 28% of what you earn.

Save extra money for:

Home inspection ($300-500)
Home value check ($300-600)
Moving your stuff ($1,000-5,000)

To save more money fast:

Stop paying for things you don't need
Spend less on daily costs
Open a special bank account
Put money in it every month

The better you plan now, the easier it will be to buy your home later.

Calculate Your Down Payment Target

Let's talk about saving money to buy your home! When you buy your house, you need to pay some money upfront. This is called a down payment.

If you get an FHA loan, you need to save 3.5% of the home price. For a regular loan, you need to save 20%. The FHA loan needs less money now but costs more each month.

Want to know how much to save? Take the price of the house you want and do some simple math. If the house costs $300,000:

For an FHA loan: Save $10,500
For a regular loan: Save $60,000

Remember to save extra money for closing costs too. These costs are about 2-5% more.

Save this extra money so you can keep your emergency savings safe.

Track Monthly Income and Expenses

To know how much house you can buy, first look at your pay after taxes. Count what you get in your paycheck each month.

Then make a list of bills you pay every month. This means things like:

Power bills
Car payments
Insurance costs
Credit card payments

When you know what money comes in and what goes out, you can see how much you can spend on a house.

This helps make sure you don't buy more house than you can pay for.

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Calculate Net Monthly Pay

Want to buy a home? First, you need to know how much money you bring home each month. This is your take-home pay – the money you get to keep after all the bills are paid.

To find your monthly take-home pay, look at your paycheck and subtract:

Money for the government (taxes)
Money for health care
Money for retirement
Any other money that comes out of your pay

Don't use your big salary number. Use the smaller number that you get to take home. This will help you know what you can really pay for a house.

If you work for yourself or your pay changes a lot, add up what you made in the last two years. Then divide by 24 to see your monthly pay. This will help you make a smart choice about how much house you can buy.

List All Monthly Expenses

Your money goes to many places each month. You need to know all of these costs before you buy a home.

First, write down the bills that stay the same each month. These are things like:

Rent
Power and water bills
Phone bills
Car payments

Then add the costs that change each month:

Food
Gas
Fun stuff

Some bills come once a year. Break these into smaller monthly chunks:

Car fixes
Holiday gifts
Yearly apps

Look at your bank records for the past three months. Find small costs you might skip:

TV apps
Gym costs
Coffee stops

Put your costs in groups. This will show you how much house you can buy.

Research Local Housing Market Prices

Looking for a home starts with knowing what houses cost in your area. This helps you plan better and know what you can afford.

Start by:

Looking at house prices on websites like Zillow
Seeing what nearby homes sold for
Looking at prices per square foot
Seeing how long homes take to sell
Checking if prices go up or down during different times of year

Don't just look at the average home price. This can trick you. Look at homes that are like the one you want to buy.

A local real estate agent can help you learn more about home prices. They know a lot about what's going on in each area.

Estimate Additional Purchase Costs

Buying a new home costs more than just the price tag. You need to save extra money for other costs that come up when you buy a house.

These are the main costs you need to know about:

Home Check: $300-$500

Someone looks at the house to make sure it's in good shape. You pay this before you buy.

House Value Check: $300-$600

A person checks how much the house is worth. You pay this when you get your loan.

Final Fees: 2-5% of house price

You pay these fees when you get the keys to your house.

Moving Costs: $1,000-$5,000

This is what you spend to move your things to the new house.

You also need to save money for:

House taxes
House insurance
HOA fees (if your house has them)
Fixes the house might need

Most banks want you to save enough money to pay for three to six months of house costs. This helps you feel safe in your new home.

Plan for Monthly Mortgage Payments

Making sure you can pay your mortgage starts with a simple math check. Look at how much money you earn each month before taxes. Your mortgage payment shouldn't be more than 28% of that amount.

Your monthly payment will cover four main things: the loan itself, interest, taxes, and home insurance. Banks will look at all of these parts when they decide to give you a loan.

Remember to save extra money for other house costs too. You'll need to pay for power, water, and fixes around the house.

If you join a home group, you might've to pay them each month as well.

Calculate Your Debt Ratio

Let's talk about your debt and how much house you can buy.

Banks want to know how much money you spend on bills each month. They look at this number next to how much money you make. They call this your debt ratio.

To find your ratio:

Write down what you pay each month for:

School loans
Car loans
Credit cards
Other loans
Future house payment

Add these numbers up.

Take that total and divide it by your monthly pay.

Banks like to see your ratio at 43% or less. This means your bills should be less than half of what you make.

For a healthy money life, try to keep your house costs under 28% of what you make. Just because a bank says you can borrow more doesn't mean you should.

The less money you spend on bills, the more freedom you have with your money. This also makes it easier to get a loan when you need one.

Factor Monthly Maintenance Costs

Your house needs more than just mortgage payments each month. Think about saving money for taking care of your home. You should save $1-3 for every $100 your house cost, each year. Put this money away each month.

You need money to fix your air system, clean your gutters, cut your grass, and keep bugs away. You also have to pay for water, power, gas, and trash pickup now. These weren't your problem when you rented. Your house needs insurance too, and you must pay taxes on it.

Keep extra money ready for things that break, like your fridge or pipes. Talk to people in your area to find out what they pay to fix things. They can tell you who does good work too.

Build Your Emergency Savings Fund

Having money saved for emergencies is super important before you buy a home.

Try to save enough to cover 3-6 months of your bills. This money helps protect you when bad things happen.

Keep it where you can get to it fast, but not with the money you're saving for your home.

Your emergency money should help pay for:

Big home fixes like when your AC breaks
Bills if you lose your job or get sick
Things you must fix right away
Higher taxes or insurance costs
New appliances if old ones stop working

Don't use this saved money to buy your house. You need it to stay safe when problems come up.

Check and Improve Credit Score

Getting a home starts with having a good credit score. You should get your free credit reports first. You can get them from Experian, TransUnion, and Equifax. Look at each report to find any wrong info that might hurt your score.

Want to make your score better? Pay your bills when they're due. Keep your credit card spending low – use less than 30% of what you can spend. Don't ask for new credit cards. Keep your old credit cards open, even if you don't use them much. If you see wrong info on your reports, tell the credit companies right away.

Most banks want to see a score of at least 620 to give you a home loan. If your score is over 740, you can get better rates and save money.

Reduce Current Living Expenses

Living costs less takes work, but you can do it!

First, write down what you spend each month on your home, lights, and getting around.

Then, look at what you pay for things you may not need, like monthly TV apps or gym passes.

Think about if these things really make your life better.

If you live by yourself, you might want to get a roommate or move in with others for a while.

This can help you save more money for your dream home later.

Track Monthly Fixed Costs

We all need to know where our money goes each month.

Let's start by looking at the bills you pay at the same time each month. When you know what you spend, you can save more money for your new home.

Write down how much you spend on:

Your home (rent, power bills, insurance)
Getting around (car costs, gas)
Health care (doctor bills, medicine)
Money you owe (student loans, credit cards)
Monthly services (phone, internet, TV)

Use a simple list or phone app to track your spending for three months.

This will show you where you can spend less. It will also help you know how much house you can buy while keeping enough money for other things you need.

Cut Unnecessary Subscriptions

Look at your monthly bills to find services you pay for each month. These could be things like Netflix, meal boxes, or online memberships. Many people forget what they pay for!

Make a list of all these services and write down how much they cost each month. Think hard about each one. Ask yourself: "Do I really use this?" "Does this make my life better?"

You can save money by sharing accounts with your family. You can also look for deals that put many services in one package.

When you cut services you don't need, put that money in your house savings. Over a year, this can add up to a lot of cash for your future home!

Share Living Space Now

Sharing your home helps you save money for your own place. When you live with others, you pay less and learn good money habits.

You can share your home in these ways:

Live with two friends in a big place – you'll pay much less rent
Stay with your family for a while and chip in what you can
Share a house with another couple to split the bills
Rent a room in someone's home
Live with a good friend and split everything down the middle

Talk about money with the people you live with. Write down who pays for what.

This helps stop fights about money and keeps you on track to save up.

Set Timeline and Savings Goals

Buying a home takes time and money. You need to save up and make a clear plan. Most people take 2-5 years to save enough money for their first home.

Here's what you need to save for:

What You Need	Part of Home Cost	How Much Money
Down Payment	3.5% – 20%	$7K – $40K
Closing Costs	2% – 5%	$4K – $10K
Safety Money	3% – 6%	$6K – $12K
Moving Costs	1% – 2%	$2K – $4K

Take your time to save. Put some money away each month. Work on making your credit score better. Learn about homes in your area. A good tip is to set up your bank to move money to a savings account each month.