How To Budget for a House

You want to buy a home of your own—but you also want to keep up your current budget habits and savings plans. Maybe you’ve heard friends’ stories about bidding wars or surprising tax bills. Or “money-pit” stories about hard-won savings falling into endless sewer, roof, and foundation repairs on a new home.

But those stories don’t have to be your story. Learn how to level up for homeownership, both before, during, and after the homebuying process.

How To Determine the Budget for a House

“For someone to be ready to purchase a home, we see the following items as prerequisites: emergency fund built up, retirement savings on autopilot, and no credit card debt,” Certified Financial Planner (CFP) Dan Slagle of Fyooz Financial Planning told The Balance by email. Slagle runs Fyooz with his wife, CFP Natalie Slagle.

“Buying a home is a big financial step. If the financial foundation isn't set prior to owning a home, you could potentially set yourself up for failure in the future,” Dan Slagle said.

Down Payment

Most lenders will require you to save 3% to 20% for a down payment, depending on your credit history and the mortgage type. Investigate down-payment assistance options to help increase your down payment. The Slagles typically recommend first-time homebuyers set aside 5% to 10% of the purchase price for the down payment.

Closing Costs

Closing costs typically run about 2% to 5% of the purchase price, and include your lender’s origination fee, recording charges, and fees for the appraisal, credit report, and tax services.

Other Costs

While you shouldn’t have to pay your buyer’s agent, remember that you may have to pay for inspections such as home or sewer inspections out of pocket. You’ll also need to present earnest money of 1% to 3% to show your seriousness as a buyer when making an offer. While your earnest money goes toward your final costs, you’ll still need fast access to that cash (and a cashier’s check).

In total, home buyers will likely need 7% to 15% of the purchase price set aside in cash for earnest money, inspections, closing, and other assorted costs, the Slagles said. This total excludes moving expenses, which likely will vary based on whether you’re moving across town or across the nation.

How Much Money Should You Have Saved After the Down Payment?

“Buying a home is not an emergency,” Dan Slagle said. “You should still have an emergency fund, even after the home purchase.”

The duo recommends a minimum of three months of living expenses. After a home purchase, living expenses could change. For example, your monthly mortgage payment could be more than your rent was. “At a bare minimum, all homeowners should have at least $10,000 in their savings account, regardless of expenses,” Slagle said. If an unexpected major repair crops up, the $10,000 will likely cover most, if not all, of the cost.

Saving for a House on a Budget

To figure out your homebuying budget, calculate how much you need for a down payment and initial expenses to purchase a new home—for example, $40,000. If you have $10,000 now, calculate how long it will take to save the rest of the $30,000 when you’re making monthly contributions toward your goal, the Slagles suggested.

If you don’t like how slow that progress may be, cut spending or boost savings. Dan Slagle said you can designate bonuses, stock compensation, and other one-time income streams to reach your goal faster as well. Save other financial windfalls, tax refunds, birthday or holiday gifts, and more.

Natalie Slagle suggests establishing a separate savings account labeled "House Fund." “This way, you see in real dollars how much you have specifically assigned for your new-home purchase,” she said. ”It also helps you see your progress along the way, which can be extremely motivating.”

Pick a dollar amount and automate it into separate savings for your homebuying fund, CFP  Katie Brewer of Your Richest Life financial planning said. If there is any extra money (from bonuses, tax refunds, or any other source), put a portion of that extra money into the homebuying fund.

Where To Save

The best place to put money for buying a home is a savings account, certificate of deposit (CD) account, or a Series I U.S. savings bond. "It's recommended to not invest money needed within a zero- to five-year period into the stock market, due to market fluctuations," Brewer said.

A Series I savings bond may be a suitable vehicle, as long as the purchase is more than a year away, Natalie Slagle said. These bonds are currently paying high rates tied to inflation. However, you must own the bonds for at least one year, and if redeemed before five years, you forfeit interest from the previous three months as a penalty. Speak with your financial advisor or do more research to determine the best way to save for your situation.

Preparing for Household Expenses

Little expenses can add up, Natalie Slagle said—especially if you are buying a single-family home versus a condo or a townhome. “For example, if you lived in a rental unit your whole life where the landscaping was done for you, this could be a big new expense,” she said. “Now you have to get lawn equipment, grass seed, mulch, plants, possibly pest control and more.”

Here are some expenses you can expect. In some cases, you may know the costs, such as your monthly house payment or homeowners association (HOA) fees. In other cases, you may need to ask the previous owner if they have copies or estimates of costs, or you’ll figure the costs out as you go.

Mortgage Payment

Your mortgage principal, mortgage interest, tax payment, and insurance payment (both homeowners and mortgage insurance) will often be bundled into one large sum every month. The tax and insurance payments go into an escrow account; the mortgage servicer will pay your bills for those annually, or as needed through the year.

Homeowners Association Fees

You may need to pay HOA dues and/or fees to a homeowners association, particularly if you bought a condo, townhome, or in a specific neighborhood. These fees may vary.

Utilities

As a homeowner, you’re usually responsible for paying for your heating, cooling, garbage, water service, internet, and other optional services. Heating costs can vary by type (oil, electric, or gas), furnace efficiency, regional location, and season. Utility costs may be significantly higher than what you paid as a renter, particularly if those costs were rolled into your rent before.

Household Maintenance

You’ll want to put aside at least 1% of your home’s purchase price for annual house repairs. “Most new homebuyers know to ask about the home’s major expense items, so they can plan to come up with the money,” Dan Slagle said. “Those bigger expenses include the driveway, roof, foundation, furnace, and potential for water damage.”

When first settling into their new home, even the Slagles were surprised by how much money they spent at a home improvement store—between $100-$300 each weekend.

Household Furnishings

A 2021 government survey of consumers revealed an average spend of about $196 per month (or $2,346 annually) on furnishings, including furniture, major and small appliances, textiles, and floor coverings. You may spend more or less than that.

Keep an eye out for furnishings at garage sales, estate sales, and discount stores such as HomeGoods and At Home superstores, Brewer said. “Set a firm limit before going to any of these places, as it is very easy to pick up just one more thing that you hadn't thought of before.”

Other Expenses

You could be surprised by the costs of homeownership, but it’s better to prepare than feel overwhelmed. Extra homeownership expenses may include:

• Garden, lawn, and walkway tools, maintenance, and improvements
• Home security system and fees
• Pest control services, equipment, and products
• Cleaning supplies
• Insulation or weatherizing materials
• Appliance repair
• Laundry products

Creating a Homeowner’s Budget (and Sticking to It)

First attempts at creating a homeowner’s budget probably will be more of a “guesstimate,” and it can be easy to underbudget for homeownership. Create categories for home improvements, repairs, and home-related items, whether in a spreadsheet or budgeting app, and carefully track expenses over time.

“A homeowner's budget can differ from a renter's budget because there are often more household items to buy at first and more decorative options and decisions,” Brewer said. “A downside can be that things can break around the house, and the homeowner is usually solely responsible for footing the bill.

“It can help to write down all of the things you want to purchase or renovate and then pick the top few that you will do over the next three months. Push off the rest until the first few are done,” Brewer said.

Watch for sales, and comparison-shop for larger purchases such as a new water heater or refrigerator. When considering home improvements, compare contractor prices and get estimates—before emergencies strike.

Frequently Asked Questions (FAQs)

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