I’m so excited you’re thinking about buying your first home! There’s nothing quite like the feeling of having your own place where you can paint the walls whatever color you want.
But let’s be real about something – figuring out how much house you can afford can be super confusing.
When I bought my first house, I had no clue what I was doing with the money part. I just knew I wanted a cute kitchen and a backyard for my dog.
The thing is, setting a realistic budget is probably the most important first step in your home buying journey. It’s way more fun to look at houses than it is to crunch numbers, I know.
But trust me on this one. Getting your budget right from the start means you won’t fall in love with houses you can’t afford or end up house-poor with no money left for, you know, actually living your life.
So grab a cup of coffee and let’s talk about how to figure out what you can actually afford. I promise to make it as painless as possible!
Understand the True Cost of Buying a Home
Here’s something I wish someone had told me: the price tag on the house is just the beginning.
Buying a home comes with all these extra costs that nobody really warns you about until you’re knee-deep in paperwork.
And the last thing you want is to drain your entire savings on the down payment only to realize you can’t afford to fix the leaky roof that suddenly appears three months after you move in.
That’s why it’s super important to understand all the costs involved before you start house hunting. Let’s break it down.
Down Payment Expectations
The down payment is that big chunk of money you pay upfront when you buy your house.
For years, everyone talked about needing 20% for a down payment. On a $300,000 house, that’s $60,000! Who has that kind of cash just sitting around?
Good news: you don’t actually need 20% down anymore. Lots of first-time buyers put down way less.
FHA loans let you put down as little as 3.5%. Some conventional loans accept 3% down. And if you qualify for a VA loan, you might not need a down payment at all.
But there’s a catch. When you put down less than 20%, you usually have to pay for private mortgage insurance. It’s basically an extra fee that protects the lender if you stop making payments.
I put 5% down on my first house and paid PMI for a few years until I built up enough equity. It wasn’t ideal, but it got me into a house way sooner than if I’d waited to save 20%.
Closing Costs
When I first heard about closing costs, I was like, “Wait, what? I have to pay MORE money?”
Closing costs are all those fees that come with finalizing your mortgage. We’re talking about loan origination fees, title insurance, appraisal fees, attorney fees, and a bunch of other stuff with boring names.
These usually add up to about 2-5% of your loan amount. On a $300,000 house, that means $6,000-$15,000 in closing costs. Ouch.
Sometimes you can negotiate for the seller to pay some of these costs. Or your lender might offer credits to help cover them. But you definitely need to plan for them in your budget.
I remember being shocked when I saw the final number for my closing costs. Don’t be like me – be prepared!
Ongoing Monthly Costs
Your monthly housing costs go way beyond just the mortgage payment.
First, there’s the mortgage itself, which includes principal (the amount you borrowed) and interest (what the bank charges you to borrow that money).
Then there’s property taxes, which can be hundreds of dollars a month depending on where you live.
Don’t forget homeowners insurance, which is required by lenders. If you’re in a flood zone or an area with specific natural disasters, you might need extra insurance too.
Many neighborhoods have HOA fees. Some are reasonable, like $50 a month. Others can be hundreds of dollars monthly.
And utilities! When I moved from an apartment to a house, my utility bills practically doubled.
Plus, you’ll need to budget for regular maintenance. The toilet will clog. The furnace will make weird noises. The lawn will need mowing. It’s just part of homeownership.
Calculate Your Income and Expenses
Before you start looking at houses, you need a super clear picture of your money situation.
Grab your pay stubs and figure out your actual take-home pay – not your salary, but what actually hits your bank account after taxes and deductions.
Then make a list of all your monthly expenses. Be honest! Include everything from your Netflix subscription to how much you spend on takeout.
Don’t forget about savings, retirement contributions, and any irregular expenses like car maintenance or holiday gifts.
Once you have all that laid out, you’ll see how much you can realistically put toward housing each month without eating ramen for dinner every night.
Determine Your Debt-to-Income (DTI) Ratio
Lenders are obsessed with this thing called the debt-to-income ratio. It’s basically a fancy way of comparing how much debt you have to how much money you make.
To calculate it, add up all your monthly debt payments (credit cards, student loans, car loans, etc.) and divide by your gross monthly income (that’s before taxes).
Most lenders want your DTI to be 43% or lower after adding in your new mortgage payment. Some prefer 36% or even lower.
When I was shopping for my first mortgage, my lender explained that my student loans were making my DTI too high. I had to pay down some debt before I could qualify for the loan amount I wanted.
Use Online Mortgage Calculators
A good mortgage calculator can be super helpful when you’re trying to figure out what you can afford.
I spent hours playing around with different home prices, down payment amounts, and interest rates to see how they affected my monthly payment.
You plug in all these numbers – the loan amount, interest rate, loan term, property taxes, insurance – and it spits out an estimated monthly payment.
Just make sure you’re using a calculator that includes taxes and insurance, not just principal and interest. That’s how I figured out my budget when I was house hunting.
Set a Maximum Budget
Now comes the part where you make a decision that your future self will either thank you for or curse you about.
Based on all the numbers you’ve crunched, set a maximum budget for your home purchase. And I mean maximum – as in, you will not look at houses that cost even $1 more.
It’s so tempting to stretch your budget “just a little” for the perfect house. But that small stretch in your monthly payment can mean years of financial stress.
My real estate agent kept showing me houses juuust above my budget, saying things like “It’s only $50 more per month!” But that adds up to $18,000 over a 30-year mortgage!
I stuck to my guns and found a great house within my budget. My bank account is much happier for it.
Account for Hidden and Unexpected Costs
Homeownership is full of surprises, and not all of them are good.
The water heater will die on the coldest day of the year. The tree in the backyard will need removing. The roof will spring a leak during rainy season.
I always tell my friends to keep at least 1-3% of their home’s value set aside each year for maintenance and repairs.
But beyond repairs, there are other costs that first-time buyers often forget about. Like lawn care equipment, furniture for rooms you didn’t have in your apartment, window treatments, and all those little trips to the hardware store that somehow always cost $100.
When we moved into our first house, we had no idea how expensive curtains would be for all those windows! It was a shock.
Get Pre-Approved
Getting pre-approved for a mortgage is like having a reality check before you start house hunting.
A lender will look at your income, assets, credit score, and debts to determine how much they’re willing to lend you.
The pre-approval letter shows sellers that you’re serious and can actually afford to buy their house. In competitive markets, most sellers won’t even consider offers without pre-approval.
Just remember: being approved for a certain amount doesn’t mean you should spend that much. Lenders often approve you for more than is comfortable for your budget.
When I got pre-approved, the number they gave me was way higher than what I knew I could comfortably afford based on my own budget calculations.
The 28/36 Rule
This is an old-school budgeting rule that still works pretty well.
The 28/36 rule says you shouldn’t spend more than 28% of your gross monthly income on housing costs, and no more than 36% on total debt (including your mortgage).
So if you make $6,000 a month before taxes, your housing costs shouldn’t exceed $1,680, and your total debt payments shouldn’t be more than $2,160.
It’s a good guideline, but you know your situation best. If you have high childcare costs or other expenses, you might need to aim for an even lower percentage.
I ended up spending about 25% of my income on housing, which left me enough wiggle room for savings and the occasional vacation.
Conclusion
Buying your first home is such an exciting milestone! But going in with a realistic budget makes the whole process so much less stressful.
I’ve seen too many friends rush into homeownership without really understanding the financial commitment. They end up house-poor, stressed about money, and unable to enjoy their new home.
Don’t let that be you! Take the time to crunch the numbers, be honest about what you can afford, and stick to your budget even when that dream house with the perfect kitchen tries to tempt you.
Remember that your first home probably won’t be your forever home. It’s okay to start small and work your way up as your income grows.
The best feeling isn’t just getting the keys to your new place – it’s knowing you can afford to live there comfortably while still saving for the future and enjoying your life.
