Budgeting Strategies For First-Time Homebuyers

Buying a house for the first time is both exciting and stressful. The prospect of owning your very own home and personalizing it to your heart’s content is a lot to take in. However, when you think about paying for your mortgage, you might start to get anxious. You might start panicking not knowing what to do. But there’s no need for this, all you need to do is to come up with a budget.

It’s not just you, everyone who has bought a home for the first time has felt the same excitement and stress. The good news is, you don’t have to be so stressed. To take off some of the stress, here are some budgeting strategies for first-time homebuyers.

budgeting strategies for first-time homebuyers

#1 – Start Saving Early

Before you even start shopping for a new house, the moment the idea of owning one crosses your mind, you need to start saving up right away. Buying a house is a huge investment and it’s not something that you can achieve just by making money on the side over a weekend or two. The first thing you’ll need to save up for is your down payment which is typically 3%-20%. But it doesn’t just stop there. Aside from the down payment, you will need to save up for other expenses associated with the house like new furniture and fixtures, and moving expenses.

Treat your house fund like any other savings. Set a target budget that is inclusive of the expense mentioned above and set an achievable timeline in which you save up for it. Decide how frequently you save; weekly, bi-monthly, monthly, etc. And also decide how much you save up each time. Once you have everything set, be consistent and save up as early as possible before deciding on buying a home.

#2 – Determine How Much You Can Afford

Of course, before you can even set a budget for your new home, you need to determine how much you can afford. Take your income and expenses into consideration and decide how much can you comfortably spend on a mortgage. Don’t budget with maxing out in mind, make sure you leave room in your budget for incidentals as well. You need to decide how much you can comfortably invest in a mortgage before talking to a lender.

One good way to determine whether or not you can afford the house you are currently eyeing is the 28% rule. This states that the cost of your mortgage should not be more than 28% of your gross earnings per month.

#3 – Shop Around for the Best Prices

Interest rates can vary from one lender to another. You need to make sure that you’re getting the best deal you can. Don’t just apply for a mortgage from your regular bank. Seek out other lenders and check if they have more competitive rates.

You can request loan estimates from several different lenders and see which ones give the best ones. Get the top three ones and ask for a “good faith estimate”. This would be based on your overall credit score and down payment capacity.

Now that you have the top three best deals you can get from lenders, take the best one and see if the others would revise their original quote for something better than the best one you’re taking. The key here is to not haggle for a better deal on one lender but to have multiple lenders bid on each other to get the lowest rate.

#4 – Research Different Mortgage Options

While the most common and most popular mortgage plan is a 30-year mortgage, it doesn’t mean that you should get it outright. Sure, monthly payments may come off cheaper. But in the long run, you might be getting a higher interest rate compared to a 15 or 20-year mortgage.

Lower term mortgages like the 15 or 20-year mortgage often come with a lower interest rate which means you will be spending less overall. However, you need to consider if this has room in your budget as these mortgages come with higher monthly payments. So look into your budget. Can you afford to pay higher monthly payments for a shorter mortgage? Or is it too heavy for your budget? Remember that with a shorter mortgage, you can be mortgage-free earlier.

#5 – Seek Out First Time Homebuyer Programs

There are plenty of federal and statewide programs to make homeownership more affordable for first-time homebuyers. Here are a few of the programs:

USDA LOANS – This is a federal program for first-time rural homebuyers. This program allows for no down payments.

VA Loans – Another federal program geared towards allowing qualified military veterans to buy a house with no down payment needed.

FHA Loans – This is a federal program that helps individuals who have a low credit score or credit scores that are not ideal to buy their first home with a low down payment

#6 – Save Up for Closing Costs

You’re not just saving up for the down payment, you’ll need to save up for closing costs as well. The buyer needs to pay this fee which comes with taking out and closing on the mortgage. This would typically cost 2%-5% of the total purchase price.

Other Expenses

Again, buying a house for the first time isn’t as simple as it sounds. Aside from the other expenses mentioned above, there are other fees associated with buying a house. You will need to consider these additional expenses when coming up with a budget.

Property Taxes

These days, it’s common for mortgage servicers to escrow property taxes, but you should still double-check. It’s better to ensure rather than assume to avoid getting a big surprise with a huge tax bill.

Homeowners Insurance

This is a typical policy that protects your home against theft and fire that you need to close on your place. Try to look into home insurance before deciding.

Homeowners Association Fees

Subdivisions do not maintain themselves. It is on the homeowners to provide for the maintenance. You should expect to pay a monthly fee for the upkeep of the common areas in your subdivision and also expect these fees to increase from year to year.

Utility Expenses – If you’ve been living in a small apartment all this time and it is your first time moving into your new home, you might notice a bigger expense in utility. This is one other point to consider when coming up with your budget. Over time, when you’re comfortable with your new home, these utility bills will even out and can be easily weaved into your budget.

Repairs and Maintenance

Another thing to keep in mind when budgeting is the cost of maintaining your home. Unlike when you were in your small apartment where your landlord fixed every leaky pipe, as a homeowner, this responsibility falls to you now. So keep this in your budget to maintain the upkeep of your home. Newer homes don’t cost much to maintain. But as your home gets older, the upkeep costs get more expensive as well.

Have an Emergency Fund

Everyone needs to have an emergency fund. But now that you are a fresh new homeowner, you must have an emergency fund. Apart from the other expenses we listed above, some incidental expenses are unavoidable.

These are things that you can’t prepare for so it’s best to have some money tucked in for the rainy days. This is not part of the budget you have thus far considering all applicable expenses when buying a house. This emergency fund, as the name suggests, is for emergencies. You don’t want to be caught in an emergency unprepared.

The Bottom Line

Owning your own home is every American’s dream. However, if you miscalculate your purchase things can go south quickly. You need to manage your expectations properly and come up with the right budget. Take notes from the tips listed here or if you know someone who has already gone through the ordeal of buying a house for the first time, talk to them. It helps to get advice from people who have already gone through this and have good budgeting strategies for first-time homebuyers.

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