It’s easy to feel overwhelmed by all the decisions that go into buying a new home. Brand-new or existing? Cottage or McMansion? Fixer-upper or move-in ready? City or country? After all, a home is a big purchase, and you want it to be a blessing for many years to come.
But one question holds the key to home-buying success: How much home can you afford?
Lucky for you, you don’t need a degree in rocket science to find the answer. You just need to know how to budget. Here are five steps to help you create your own home-buying budget.
Step 1: Add Up Your Income
You can’t make a budget if you don’t know how much you can spend. So sit down and add up every source of income you receive each month.
Let’s crunch numbers based on a two-earner household. In our example, Josh brings home two paychecks a month, while his wife Jess receives one.
Josh and Jess’s Monthly Household Income
Step 2: List Your Household Expenses
Next, write down every place your dollars go each month.
See how much house you can afford with our free mortgage calculator!
Josh and Jess rent a one-bedroom apartment in the heart of town so they can be close to work. They're setting aside a big chunk of their take-home pay for a down payment on their new home. Here’s how their current budget looks:
Josh and Jess’s Pre-Home Budget
Of course, everybody’s budget is going to be different. We’ve assumed some things in this sample. If some of these categories don’t fit, feel free to make them your own.
Step 3: Calculate Homeownership Costs
Okay, now make sure to limit your housing payment to no more than 25% of your monthly take-home pay—otherwise you’d be house poor!
That 25% limit includes principal, interest, property taxes, homeowner’s insurance and, if your down payment is lower than 20%, private mortgage insurance (PMI). Plus, don’t forget to consider homeowners association (HOA) fees—if your new home is part of an HOA.
As for Josh and Jess, the maximum amount they should spend on their home payment each month is $1,500 ($6,000 x 25% = $1,500). But Josh and Jess also need to make room in their budget for expenses like home maintenance and repair. And they need to add extra heft to utilities and transportation since they’ll have more square footage and a longer commute in their new home.
Josh and Jess’s down-payment goal will be complete when they purchase a home—meaning they can lower the amount of money they put into savings, and then use what’s left over to bump up the budget where needed.
Josh and Jess’s Budget: Changes Made With Homeownership in Mind
With these adjustments, Josh and Jess still have money left over—but the budgeting doesn’t stop here.
Step 4: Give Your Budget Room to Grow
Life is going to happen in the years you occupy your home. Before you take on a mortgage, look ahead and consider events that might increase your living expenses down the road.
Josh and Jess don’t have children yet but hope to start a family next year. Guess what? Kids cost money! Let’s say they need $800 a month to help support Junior’s first years of life. Depending on what you make or where you live, it could be more, it could be less.
Josh and Jess build cushion for Junior into their budget by parking an additional $800 into their savings account each month. That puts their savings total at $1,400 and bumps their monthly expenses up to $6,550.
Josh and Jess’s Budget: Changes Made With Kids in Mind
Step 5: Make Adjustments
Right now, Josh and Jess’s expenses outweigh their income by $550, so they’ve got some balancing to do. Josh and Jess realize that spending 25% of their income on a mortgage will squeeze out their ability to afford diapers and daycare. So they aim for a more conservative home payment and tighten the purse strings in a few other areas.
Josh and Jess’s Final Home-Buying Budget
Boost Your Buying Power
When income minus outgo equals zero, your job is done because every dollar has a name. That means you can feel confident buying a home that won’t bust your budget. Just keep your mortgage to 25%—or less!—of your monthly income and don’t borrow so much that you can’t breathe if life changes down the road.
Now that you know the secret to being a happy homeowner, it’s time to go out and get the most home for your money! All you need is an expert negotiator by your side. The buyers’ agents we trust in our Endorsed Local Providers (ELP) program bring your best interests to the table—that’s how they’ve earned the right to be called RamseyTrusted. They can help you find a home that’s right for you and your budget.