Stress Free Budgeting For Buying A House

Certified Mortgage Advisor
NMLS 1701021
Published 
February 12, 2020

Stress and worry free budgeting

Now let's talk about how do you budget to buy a home specifically? How do you do it? Stress-free and worry free. When you're budgeting to buy a house, it can seem overwhelming. So let's first talk about the Overview of some things that we need to have ready when we are budgeting because there are basically two steps that you have when you're budgeting for a home.

You're one budgeting for the preparation, and then you're budgeting for the maintenance. So you're budgeting to prepare, to buy a house, to make sure you have the ability to afford the monthly payment and the down payment and closing costs. And you're also making sure that you have the budget to keep that home long-term to make sure that you don't fall behind on mortgage payments.

Mindset

So let's dive into an overview of what we need to have ready when we're purchasing a home. Number one is a mindset is we need to understand that we do not have to keep up with the Joneses. Dave Ramsey talks about this all the time because the Joneses are broke.

Don't get deceived by shiny things

There's one thing one big takeaway that I've got from this job working in the mortgage industry is that. Most of the people you see who you think have a really nice car, a really nice house. It seems like they have all of these things. Those are the people who most likely don't have money and they have a lot of debt.

Live below your means

You do not have to keep up with other people. I know it's difficult. For instance, I'm in the period in my life where all my friends are getting engaged, married, having kids, moving into homes, and have just started new jobs and new cities. Everything's exciting and new.

You have your own timeline

So it can be really easy to compare my life to their life. And it can be the same thing with where you're at. You might be comparing where you're at and where your family is at compared to everybody else, but just know you're on your own timeline. Do the things that make you and your family happy, push towards those things, and not keep up in taking on debt or taking on things that make you uncomfortable long-term just to impress some other people.

Waiting is perfectly okay

If you are, if we're going through this and you get discouraged by some of these numbers or you feel like there's no way buying is right for me in the short-term future, that is okay. That's part of your timeline. There's nothing to be ashamed of in that renting is just buying patients renting. Is there, so you could have a home, a place to live while you're working on getting other things done.

Buying a home is just a journey and not a race

Getting a home is not a destination to get to. It's just part of the journey that you're on. So don't put so much pressure and stress on buying a house.

Paying off debts

Also, something to keep in mind is you want to look at your debts, especially things like high-interest credit card debt before. You start working on purchasing a home and saving up money for a home. Because these debts or things are going to make that house really difficult for you in the future.

Because if you're managing really expensive credit card debt really expensive payday loans or things like that, then managing a mortgage, payment's going to be difficult with having those debts, continuing to just gain interest. So we want to try to take off these. First, there is no point in having these debts there.

So before you start saving for a home, try paying off debt. I really enjoyed Dave Ramsey's. What do you call these baby steps? And he talks about the idea of saving a thousand dollars than paying off all your. And then saving up an emergency fund. I don't think you have to go as extreme as he does all the time, but really consider paying off some of this debt before you start purchasing a home.

You want that house to be a blessing for you. You want it to be something that creates joy for you and your family and wealth for you and your family.

Savings

So now let's jump into savings. We're going to expect to this point, debt has been paid off of at least the credit card debt. You might still have an auto loan or student loans, and that's okay if you have those things. But we want to talk about savings.

Three big categories of savings

So there are three big categories of savings. One is you have an emergency fund. Two, you have your down payment and closing costs, and three you have a home maintenance fund.

Emergency fund

So the difference here is number one is your emergency fund is for your personal expenses. Normally this is three to six months of your monthly expenses saved in an account. So what you would do is find what you spend each month on normal expenses like gas, groceries, any subscriptions that you have, utilities, and things like that. Then you want to have three to six months of that saved in an account somewhere.

The struggle with that is you're also building up your down payment at the same time, and this is going to depend on the program. And I have some videos on different down payments you can check out. But you're also going to be saving for your down.

Maintenance fund

Then number three is you also have somewhat of a maintenance fund, right? You want to make sure you have money set aside for your house in case you ever need, there are repairs that you need or something breaks. You have money set aside. So how do you manage to save for all three of these at the same time, it can be difficult.

What I'm going to suggest

Is number one, again, going back to the debt payoff. If you pay off your debts, you're going to have a lot of monthly cash flow freed up there. But what I would suggest in your emergency fund is maybe let's try three months here. And let's connect these two, let's make these the same account.

So you have three months of expenses and we're going to use that fund as well. If there's something wrong with the home. So automatically we don't have to worry about this maintenance fund. So we're mainly trying to look at how we fund our emergency fund. And then after we get that, then we're going to fund our down payment.

So the reason why you want these reserves here is that you don't want to put your down payment on a home and then have no cash left over in the bank that puts you in a position where you went from having a lot of liquid cash to not a liquid, a lot of liquid cash. And if an emergency comes up, you might have to take out debt for it.

So it's good to have some money in your bank as a cushion before you start saving for your down payment and don't let your down payment funds move into your emergency fund.

Learning how to budget means we need to calculate

So now let's talk a little bit more about how we calculate, how much you should be spending, and how much you should be budgeting on housing expenses. Something we need to know first is the difference between how the lender qualifies you and how you should choose the loan that you want.

What you could borrow

So first of all, when you're qualifying for a loan, a lender is going to look at your gross pay. So let's say that's $5,000 per month. That's a $60,000 salary a year. So they're going to look at your gross pay to see what you can qualify for on a mortgage. So gross pay is before taxes, and this is what you could borrow. Just what you could borrow. On the other hand, you're looking at your budget and you're going to be looking at your net.

Because you might make five grand a month, but you might only take home $3,500 per month. After all of your taxes, and all your deductions, you might only take home 3,500. So there's no point in making a budget off of five grand since you only take home 3,500. So your net income shows you what you should budget for.

The big difference

Lenders are looking at what you could afford, and you should be looking at what you should afford. And the difference is lenders are looking or looking at gross. So they're going to qualify you most likely for more of a mortgage than you should take on. Because they're looking at gross income. They're going to qualify you for a lot more than you probably should take on.

Banks & lenders will not help you budget

Also, note that lenders and banks are not your budgeting help. They're not financial advisors. They are going to qualify you for a mortgage based on -- If you're able be qualified for it or not. But you're ultimately the one who can decide if it fits in your budget.

So how do we know if it fits your budget?

A really good rule of thumb, at least I think, you're going to see all over them, on the internet, so many different equations and strategies and tools and ways to figure it out. Ultimately, I think the best thing for you is to figure out what's comfortable. That's the best way to figure out what's in your budget.

But I think that this number of 25% of take-home pay is a really solid number to start with. So what we want in this 25% number is for it to include your principal, interest, your property taxes, your homeowner's insurance, both regular homeowners, insurance, and mortgage insurance, if you have any, and homeowners association. So pretty much everything minus utilities is in that 25%.

So let's say that in this example, your gross pay is $5,000. And let's say your take-home pay is 3,500. If I multiply that times, 0.25, that leaves me with $875. So if I have $875, what that's telling me is that 25% of my take-home pay is $875. That's the max that I might want to spend on all of these items here added together.

So when I get quotes from different mortgage lenders, I want to tell them, Hey, I'm looking to stick around $875 as my housing budget. Can you help me figure out what that would look like? What kind of purchase price, what kind of down payment would that look like. And this is just a starting point. You might look at 8 75 and say that's too much for me. Or maybe it's the opposite.

Know what's agreeable for your budget

You're ultimately going to have to figure out what's comfortable for you. But 25% of take-home pay is really easy to calculate. And it's going to give you a really good start on figuring out if it's in the qualifiable range. If you should do it again, it might be higher.

You might go all the way up to a thousand dollars and say that's still really comfortable for me. Or you might go down and say maybe what's more comfortable for me is $700 a month. It really just.

High-cost area, this is not for you

One quick side note is if you're in a high-cost area like California, I'm sorry, but these are just all going to be based on averages of most us cities. So if you're in a high-cost area like California or New York, then things are just way outlier and a little out of balance from this conversation.

What we should do

But this is what you should be doing, take you to find your household income. What do you get net pay and then use 25% to figure out if a good starting point for your housing payment.

Actual mortgage and how we figure it out

When you aren't purchasing a home, obviously there are more costs to consider than just the actual mortgage payment. And it can be difficult to estimate some of these numbers, right? You saw principal and interest taxes, insurance, homeowners, and association utilities. How do you actually figure these out?

PITIA

So what I have here are actually national averages on what these things cost. So let's walk through them and then go through an example. So back here on this example, we have what it's called PITIA or Principal Interest Taxes, Insurance, and Assessments. So that is the mortgage jargon for that.

But when you're purchasing a home, you obviously have utilities and any maintenance expenses on top of that. So here's what. For principle and interest, we need to use a calculator to figure that out. There's no good, easy formula. To figure that out, you can use something, some online tool to figure out what your mortgage payment would be.

Taxes

Taxes are going to be 2.2% of your purchase price annually.

Mortgage insurance

Mortgage insurance is 0.5% of your loan amount annually.

Homeowner's insurance

Homeowners insurance is 0.75% of your purchase price.

HOA

Homeowners association is going to be guests depending on the area that you're in.

Utilities

Utilities are 1.4% annually, and these are national averages. And these are going to change all over the US but let's run through an example.

Let's compute

Let's say that our principal and interest actually let's do this. Let's say that we are purchasing a $200,000. So we're purchasing a $200,000 home with, let's say 5% down. So our principal and interest are going to be $905 a month.

Now I've found this by just Googling a quick mortgage calculator to figure out that number. Now I want to figure out my taxes annually. So I'm going to take $200,000 times a 0.0 to two. That's going to give me $4,400 per year. I'm going to divide that by two. So 366 is what we have here. And again, this is going to vary depending on where you're at, but this is a national average.

Since I am putting less than 20% down, we're going to calculate mortgage insurance. So we're going to do it based on the loan. So since it's a $200,000 loan, I can take that times 0.95 since I put 5% down. I have $190,000 loan times. Point zero, zero five. That's nine 50 divided by 12, $79 a month in mortgage insurance.

Now I'm going to do homeowners insurance. So 200,000 times 0.0075, and divide that by 12. Homeowners insurance or homeowners association fees. You might not have one. Let's say in this instance, we don't have one. Some areas might be $25. Might be up to $400. It really just depends. But we're going to say zero. Then utilities is always a difficult one to guess. But 1.4% annually is a good average across the IS. So I would take $200,000 times 0.014, divide that by 12, and that gives me 233.

So now I have all these items listed out on what I have an estimate of what they're going to cost in my budget. So this helps me put everything together well, so I can total these all up so I can take 905 plus 366 plus 79 plus 125 plus 233. And I can see my approximate housing expense. It's about $1,700 per month with everything included.

Prepare yourself from huge expenses

So we can see that if you're not considering all the other factors that go into you purchasing a home like taxes and insurance and utilities, then all of a sudden, if you go under contract with a house, continued as a purchase. It can feel a little overwhelming because you weren't prepared for a number that was this big.

So just going through a simple exercise, like this is going to be really helpful. So then when you talk with a mortgage advisor and you talk with the realtor, you can have a better picture of what these numbers look like for you.

YNAB for Zero-based budgeting

Just some tips. Number one is we want to make a general budget. I use a tool called YouNeedaBudget.com. You can go to YNAB and this is a fantastic tool to help you do zero-based budgeting. And this is a strategy where every dollar gets a job and you basically spend that money before you actually see it.

So what ends up happening in a tool like YNAB or there's another one called EveryDollar.

What is zero-based budgeting?

Basically what happens is let's say I get paid today, so I take that money and then I go and throw it in all of the buckets in my account. And each of those buckets says different things. They might say gas or groceries. I might say utilities. Maybe I have a section for fund money. There are all of these things in there that I have as buckets. And so I put all those money into those buckets so they have a job. Then what ends up happening is I'm never tempted to go spend that money or figure out where my money is because it's in those buckets, all the time.

Instead of trying to predict where your income is going to be each month, what you do is you only budget the money when it comes in, when you get paid, then you separate it out in your bank account with these buckets. So each dollar has a job, where it's going, and if it's being used effectively or not.

Then what I do is let's say I funded my budget today and I have a hundred dollars in it for groceries. Then when I go to the grocery store, I can pull up YNAB and see how much money I have available to spend today with groceries. It's like an envelope, style banking, but on your phone or on your computer. So something to check out there.

What can budget help you with

Your budget is something that's going to help you prepare, and maintain. So don't forget that this budget has two purposes.

Prepare

It's going to help you prepare to buy a house. Maybe you're not ready yet, but you're preparing. So you're saving money for your emergency fund. You're paying off debts.

Maintain

You're saving up for a down payment and then it's also helping you maintain. So when you do purchase the home, you're ready to pay these utility bills when they come due. And they're not a shock. You are ready to pay the insurance when it comes due and it's not a shock.

Strategy 1: It's okay to wait

So a couple of strategies. Number one is it's okay to wait. Waiting is perfectly fine. Even if you see other people buying all the time, it's okay. Renting is buying patience. You ultimately need to decide what you want to do. That's going to be best for you and your family. Moving forward. It might not be purchasing a home right now might be purchasing a home in five years. Once you get everything taken care of. And that's okay.

Strategy 2: Move up purchase

Move up purchase is basically where you're saying, Hey, we know that we're not going to be able to purchase the home that we want right now, but instead we're going to purchase a smaller home, build up equity in it and then sell that and move to another home. So for instance, maybe your dream goal is to have a $400,000 house.

So $400,000 is your dream home, but you can't afford that right now. So what do you do in this. If you purchase maybe a hundred thousand dollar house. Okay. And while you're living in that for a couple of years, your home values going up, you're gaining appreciation and you're paying down your mortgage and then you sell it and you have money for a down payment on a $200,000.

The same thing happens, your home value is going up. You're paying down your mortgage, you build equity, you sell it. And then you put a down payment on this bigger home. So this is what's called a move-up purchase. It's just again, being patient with your home buying.

House hacking

Then another option is what's called house hacking. How's hacking is where you buy a duplex or any type of multiunit. So a duplex, triplex, or a quadplex, and basically you would live in one. Then all of your other units would pay rent to you. This is a great way to have some money offset, if a total, a full housing expense, or a full housing payment, isn't in your budget.

Preparation phase or the maintenance phase

So hopefully this gives you an idea of what's a budget for when you're looking at purchasing a home. There are really two phases that you're in and you need to figure out which phase is going to be the one that you're in right now. Are you in the preparation phase or the maintenance phase?

For most of you, you're probably in the preparation phase. And if so, just be patient list out your budget, and take things to step by step and you'll be okay.

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