How to Budget for a New Home [Checklist]

Purchasing a home, adjusting to it and your new living situation won’t be a good experience if you can’t afford anything other than your mortgage payment. Just because you can afford a 3000-square-foot home doesn’t necessarily mean you should.

Here are some considerations for how to budget for a new home.

Determine how much you can spend on a monthly mortgage payment

First, remind yourself of how many others have bought homes. If they can do it, so can you! But of course you want to make the purchase as smartly as possible and ensure you don’t bite off more than you can chew.

One simple way to determine how much you should spend on a home is to use the 28/36 rule. 

Housing-related costs shouldn’t be more than 28% of your gross income each month. And all your debts combined — mortgage, credit cards, car loans, etc. — shouldn’t be more than 36%. So even if you can afford a mortgage that’s 25% of your gross income, if you have a car or credit card payment that’s taking up a chunk of your income, that still may be too much. 

Mortgage lenders will want to look at your debt-to-income ratio when they’re considering potential rates for your loan, and maintaining the 28/36 rule will ensure you’ll receive a competitive rate while also keeping expenses low for you.

Determine how much your mortgage will cost

Now that you know what you can afford, you’ll need to consider several different factors that actually make up how much you’ll be spending on a mortgage. 

Down payment

The higher down payment you can make, the better. Most experts recommend putting down at least 20% of the home’s listing price. 

20% is a pretty large chunk of money, however, and if you don’t have that amount available, that’s okay as well. Just be aware that private mortgage insurance (commonly referred to as PMI) will be added to your mortgage rate if you put down less than 20% of your home’s value. 

PMI is a recurring percentage that will be added until you’ve reached that 20% threshold.

Escrow costs

There are two other costs that you’ll need to be aware of when you’re calculating your monthly housing payment. Outside of your mortgage are home insurance fees and property taxes. 

Both of these costs are typically paid once per year, and most lenders will cover the annual cost and split it up into monthly payments for you, grouping it in with your mortgage. 

Also, both of these can vary greatly on your home’s location and a myriad of other factors, so you’ll need to do a bit of research to have some idea of what those costs will be for you.

To find home insurance fees, contact your insurance agency to find out what typical costs might be on the homes in your price range. 

To find property taxes, look up previous years’ property tax amounts for the home you want to buy or one in the same area and around the same size. Property taxes are public record, so you should be able to locate these easily to provide you with an idea of what you’ll be paying.  

Loan factors

Of course one of the biggest factors in your monthly mortgage payment is current loan rates. You should have an idea of what rates you might be getting, but if you don’t, simply googling average current rates will provide you with a rough estimate to factor into your calculations. 

You’ll also want to consider what terms are best for you. With 15- or 30-year mortgages available, you have options. Each of these has pros and cons, so research what fits your current situation best. 

Calculate

Once you’ve considered all these factors, plug these numbers into a calculator like this one from NerdWallet, and this will give you a pretty good idea of what your total monthly cost will be. 

Compare this to your 28/36 rule and see how you measure up, then adjust accordingly.

Factor in upkeep costs

The monthly mortgage payments aren’t all you’ll need to consider, however. Beyond just paying for the house, you’ll also want to plan for maintenance and repairs.

Homeowners association fees (HOA)

If you’re planning to live in a neighborhood that has an HOA, these are costs you’ll want to consider. Some rates are set, others fluctuate. Some can be paid monthly, while others must be paid in an annual lump sum. Just know this is an added expense before you make the final purchase.

Maintenance and repairs

Replacing a roof, updating your HVAC unit, pest control — everything you used to call a landlord for is now your responsibility and expense. 

There are periodic maintenance tasks you should plan for and even some upcoming repairs you know you’ll need to make. 

Then there are the incidents that happen occasionally that you haven’t planned for and weren’t expecting. And you need to prepare yourself for those too.

You should start saving for the known maintenance or repairs, as well as start a housing emergency savings fund so you have some cushion when your plumbing fails or your electrical unit needs to be replaced. 

Get ready for the adventure

Homeownership is not for the faint of heart, but owning your own home and having an asset of your own is certainly a goal worth celebrating… So make sure you set aside a small budget for champagne. 

Review our checklist below on how to budget for your new home.

Checklist:

1. Determine how much you can spend on a monthly mortgage payment

   • Calculate 28% of your annual household income to find the monthly payment you can afford

2. Determine how much your mortgage will cost

   • Determine how much you can provide for a down payment

   • Ideally 20% the home’s value

   • Look up previous years’ property tax amounts for the home you want to buy

   • Talk to your insurance agency about homeowners insurance costs

   • Add in any homeowners association (HOA) fees

   • Consider the best loan terms for you (15 or 30 years)

   • Look up the current loan rates and factor those into your calculations

   • Add in private mortgage insurance (PMI) if your down payment is less than 20%

3. Factor in upkeep costs

   • Plan ahead for maintenance and repairs, both known and unknown

   • Start a housing emergency savings fund