I’ve been thinking a lot about the home buying process lately since I’m gearing up to buy a house in the next couple of years. After my first house buying experience I’ve learned a lot and am much more prepared to jump into home ownership.
Since buying a home is one of the largest purchases a person will even make, it is one that should be carefully planned for and free of mistakes. A mistake when buying a house can be one of your most costly mistakes ever made.
I’ve been learning and sharing as much as possible about the home buying process so I don’t make a mistake and hopefully others in the same stage of life don’t either. One thing I’ve learned that is super important is the down payment.
Below are the things you might want to consider when deciding how much to save up for a house.
What will you have to pay for when buying a home?
There are a lot of expenses that come with buying a house, including a lot of unexpected expenses. All of the expenses associated with buying a home should be considered and budgeting for when decided what amount of house you can afford. Being prepared for all these expenses will make the process a lot easier.
For example, you’ll have to pay for all of these items:
- House price – The price of the home you purchase is the largest expense and the first one you should consider. Make sure you think about the interest rate on your mortgage in this number too because it’s not just the initial price that you will be paying.
- Property taxes – Depending on where you live your property taxes could be rather high. Before offering to buy a house check on the property taxes for that specific house. You might pay $2,400 a year more for a house located in a city while a house 5 minutes down the road costs less in property taxes each year just where it is located. This is definitely a budget item to consider.
- Home insurance – You will have to properly insure your home against the unthinkable. Make sure your home is covered for any additional needed insurance above the basics to cover things like earthquakes and flooding.
- Utility bills – This can be hard to gauge before buying a home but it’s a good idea to get a general sense of how much it will cost you each month for utilities in a home. You can call your local utility provider and ask for the average bill over the last 12 months for the address. I do this every time I move because it helps to know what I’ll have to spend to get basic services.
- And more – This list could go on and on! when closing there are inspection and closing fees. When moving in there are moving expenses and new furniture purchases. Then there are home repairs and yard maintenance and so on. There are a lot of things to consider so sitting down and writing everything out will help you consider what you will have to spend.
Make sure you remember all the extra things that cost money when buying a house.
How much money should I spend on a house?
It’s a hard question to answer for someone else. It depends on a lot of personal factors like the area you live in and your income levels.
Generally people are told to take out a home loan that is around 25% to 30% of their after-tax take home income. Spending a third of your income on housing is an acceptable amount that is widely encouraged by financial advisors.
In my city there are lots of adorable homes in the range of $90,000 – $110,000. Based on two incomes I will probably end up purchasing a home somewhere in that range. Since it’s a ways off there is still a lot of time before deciding on the exact number to spend on a house. I will definitely have a more exact and very strict budget before actually buying a house. It helps to have a budget for home spending before even looking at houses.
I’d also suggest spending way less than you are approved for when buying a house. The last house I planned to buy was roughly half the price I was approved for and I thought that was a very reasonable and cute house. You don’t have to max out your budget and spending capability when buying a home! Do what feels right and give yourself some spending breathing room.
How much money should I save up for a house down payment?
Currently I’m working on saving up for a house down payment. It’s a small fund currently and grows just a tiny bit each month. This is going to be my number one goal and I plan to stash away as much as possible in this account.
Depending on the lender, and the state of the economy, you can put down as little as 2.5% on a home, or you can be asked to put down 20% to 30% of the purchase price.
How much money you put down on a house will depend on what you lender requires and how much you can afford.
The standard minimum is usually 20% and this will prevent you from paying PMI, private mortgage insurance. Adding that expenses can make a home unaffordable so it’s often best to avoid it.
Most financial experts recommend that you save up enough to put 20% down on a house. People like Dave Ramsey urge you to do this but also make concessions for first time home buyers and concede that it’s easier sometimes to only save up 10% of the purchase price.
But the golden standard is definitely a 20% down payment!
If you plan to purchase a home for a price of $100,000 then the down payment you will want to put down is $20,000. You can scale up from there to the house price in your area.
Even for a lower priced house, that’s a pretty big chunk of money in my world! We will see if I can get that amount saved up or something close to it by the time I’m ready to buy a home in the next few years. At the very least I plan to put down 5-10% on the house as a first time home buyer.
How much money did you save up for a home? What percentage down payment did you make?