With the beginning of spring and more interest-rate hikes coming up, a lot of people are wondering if it's time to make the jump from renter to homeowner. Of course, making such a move involves much more than browsing real estate listings and cobbling together enough for a down payment.
One of the most important things a first-time homebuyer can do is prepare their budget for this big financial event. We asked our partners and money-savers extraordinaire at Clark.com to share some of their best budgeting tips for people looking to buy a home this year. Here are Clark.com Managing Editor Alex Sadler's responses, edited for length.
What Tweaks Should People Make to Their Budgets in Preparation for Buying a Home?
First of all, there's a whole lot more that goes into buying a home than many people realize. I'm actually going through the process right now, and believe me, it ain't like walking into a leasing office and signing up for an apartment.
When you're preparing your finances for buying a house, here are a few steps you need to take first:
- Get your credit in shape: The higher your credit score, the better deal you'll get on a mortgage. The goal is to get approved for the lowest interest rate possible, so before you apply, make sure your credit is in good shape. [Editor's note: If you're not sure where your credit stands, we've got you covered. You can get your free credit report snapshot on Credit.com, and it's updated every 14 days.]
- Have enough saved for a down payment – and then some: A good amount to shoot for is 20% of the purchase price. If you put down less money, you still may be able to get a loan, but it'll come with higher monthly payments. Plus, typically when you put down any less than 20%, you'll need to have private mortgage insurance, which is another monthly bill to prepare for.
- Prepare for other upfront costs: Home inspection (a few hundred dollars), closing costs (estimate between 2% to 5% of purchase price) and extra cash. Some lenders may require you to have some cash in the bank after the purchase is complete, maybe two to six months' worth of mortgage payments.
In terms of your monthly budget once you're in the house, a good rule of thumb is to spend no more than 25% of your income on housing – including mortgage payments, private mortgage insurance (PMI, if you need it), property taxes, homeowners insurance — all the monthly bills specifically tied to the house.
What Are Things Renters Don't Have to Budget for but Homeowners Do?
Buying a house is exciting, but you need to go ahead and prepare yourself for unexpected expenses — that's just the reality of owning a home. No more calling the landlord or leasing office to come fix something. Whether it's a broken light bulb or a busted HVAC, the cost of that repair is coming out your pocket. Basically, you should overestimate how much money you'll need to cover all of your expenses each month.
Give yourself a cushion to fall back on — cash savings you can dip into to pay for an unexpected repair or to cover your bills in case you lose your job or can't work for a period of time for whatever reason.
A few other costs that come with owning a home: property taxes, homeowners insurance, disaster insurance required for homes in certain areas, higher bills (utilities, heating, air conditioning), maintenance — any and everything is your responsibility.
The bigger the house, the more expensive every single bill will be. Keeping up with regular maintenance is crucial in order to avoid bigger, more expensive repairs down the road
What Are Tips for Transitioning Your Budget From That of a Renter's to a Homeowner's?
Come up with a monthly budget to cover all of your expenses as a homeowner, and start living on that amount now. It will force you to save the money that you won't have the luxury of spending once you own that house. Send it directly into savings so you don't give yourself a chance to spend it.
How Can Homebuyers Make Sure They're Not Biting Off More Than They Can Chew?
Just because you can qualify for a bigger house doesn't mean you should buy one. The financial risks are extremely serious.
No one plans for unexpected setbacks like job loss, emergencies, medical issues — and if you aren't prepared financially, one big unexpected event can be devastating not only to your short-term financial health but also your long-term finances. If you can't pay the mortgage payments, the lender is coming after your house. If you have nothing to save each month, you're giving up retirement savings and everything else that comes with being financially independent.
Bottom line: Buy less house than you can afford. And even on a less serious scale, you don't want to live in a house that you can't afford to furnish, or you can't afford to take vacations because you have nothing left to spend or save each month.
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