Preparing to purchase a home can be an exciting process, but that's not to say it doesn't come without stress. Arguably the most dreadful part of the home buying process is, you guessed it - the financials.
To complicate things further, loved ones and the internet may offer a million different pieces of advice, sometimes even contradicting one another! With all of this excess information, it's easy to see why the home buying process can be overwhelming. But don't worry, we've rounded up the basics for you so you can get back to what matters – saving for your dream home!
What Do You Need to Save For?
Before diving into ways to save, let's first consider what you need to save for beyond the standard mortgage and down payment. If you don't know what to save for, you won't know how much to save!
The first thing you will typically start saving is your down payment. The amount you put down for a down payment will pave the way for your loan amount and future mortgage payments. If this is your first time purchasing a home, you may qualify for an FHA loan which means only a 3% down payment is required. That equals out to roughly $10,000 for a $300,000 home! With that being said, the more you put down, the lower your mortgage payments will be in the future.
Closing costs represent the journey of taking the home from “in escrow” to yours. Typically closing costs range from 2-3% of the price of the home. Buyers and sellers have their individual closing costs, such as escrow, where each party pays their own. There are also closing costs specific to just the buyer or the seller. For example, if you are a buyer, there is no realtor fee, as those are paid out of the seller’s closing costs. This also includes the cost of borrowing money which is called the loan origination fee. Many of these fees are related to conducting investigations about the house to make sure that you have all the information on the home before closing the deal, including the inspection, appraisal, and title.
The next significant cost when it comes to home purchasing is your monthly payments or mortgage. While you don't necessarily need to save up for these ahead of your move, it's a good idea to have a safety net before living in the home. Should anything go wrong, you will have months of mortgage payments prepared and major peace of mind!
Your monthly payments will vary depending on the down payment you put down and the overall cost of the home. Typically your house payments should only be a third of your gross annual income. So, for the $300,000 home mentioned in the last section with a $10,000 down payment and 3% interest rate, you can expect a monthly mortgage of roughly $1,600. Having six months or more of these payments saved up is ideal. That equates to at least 9,600, give or take.
Utilities & Emergency Fund
If you plan to live (i.e., sleep, breathe, eat) in your new home, you'll have utilities. Utilities include electricity, air conditioning, sewer, garbage, and more. Usually paid monthly, though sometimes quarterly or as needed, your utility cost can vary greatly. The more occupants and use, the more your utilities will cost. Because you're unfamiliar with the costs of your utilities in the new home, it's best to have a slight safety net while you gauge the standard price.
It's all too easy to skip budgeting for an emergency fund, thinking you will get to it someday. However the last thing you want is an emergency to happen when you don't have the costs to cover it. Especially true if you're purchasing an older home, you'll want to budget for an emergency fund prior to moving in.
Imagine you're still settling into the new home and running the dishwasher for the first time when a pipe suddenly bursts. Now you have a flooded kitchen, and the repairman estimates $1,000 or more for the repair. Yikes! Having an established emergency fund to pull from for surprise problems is vital. In that same notion, don't skimp on homeowner's insurance! Sometimes, no amount of saving can prepare for when a catastrophe strikes.
Ever so popular these days, you may be thinking of purchasing a fixer-upper. If that's the case, you will need a healthy budget to cover remodeling costs. You may be able to qualify for a loan that covers some of those renovations, but it's best to have that safety net in case something goes wrong, such as uncovering a significant issue that you weren't aware of. Think dry rot, faulty wiring, etc.