How To Budget For A House: A Step-By-Step Guide

If you’ve been thinking about buying a house, you’ve likely started to think about your budget. From saving for a down payment and covering closing costs to planning for ongoing expenses like furnishings and renovations, there is a lot to factor in.

To help you get started with your budget, we’ll delve into the step-by-step process of creating a budget for your home purchase journey.

How Much Should You Budget For A House?

What are the average costs of buying and maintaining a home? Let's look at some home maintenance cost statistics for this year.

In the fourth quarter of 2023, the average sales price of houses sold for the United States was $492,300 through the U.S. Census Bureau and U.S. Department of Housing and Urban Development from the Federal Reserve Bank of St. Louis. The state of the housing market plays a role in mortgage rates and home prices. Remember that you'll pay a down payment (you can put down less than 20% with certain types of loans) and pay between 3% – 6% of the loan amount in closing costs.

Many homeowners ranked budgeting and financing as the most difficult aspect of home improvements (39%), compared to tackling unforeseen issues (27%) and DIY versus hiring professionals (27%). Home services website Angi reported that home improvement spending increased in 2023 to $9,542. The projects decreased from 3.2 in 2022 to 2.8 in 2023.

Many home buyers use the 28/36 rule to determine how much they can spend on a house. The strategy says buyers shouldn’t spend more than 28% of their gross monthly income on housing expenses and limit all other debt payments to 36%.

You may follow other rules and guidelines, including the 35%/45% rule or the 25% rule:

• 35%/45% rule: Your total monthly debt shouldn't exceed more than 35% of your pretax income and shouldn't exceed more than 45% of your post-tax income. To calculate the first part of the rule, multiply your gross monthly income by 0.35. On the second part, multiply your monthly income after taxes by 0.45.
• 25% rule: The 25% rule allows you to use your net income in calculations, and in this rule, you consider no more than 25% of your post-tax income in housing costs. You can find this by multiplying your monthly income after taxes by 0.25.

Budgeting For A Home In 7 Steps

Look at the following steps to create a home budget and learn how to budget for a house.

1. Start With Your Monthly Income

Any house budget should start with your income, or all wages and other earnings. Add up all your income streams to calculate a gross total. Your gross monthly income is the amount you bring home before taxes and deductions.

Example

Here's an example of multiple income streams:

• Earned income (from a job): $6,000
• Commissions: $500
• Investment returns: $200
• Side hustle: $300
• Alimony: $1,000

Total: $8,000

2. Subtract Your Monthly Expenses

Next, subtract all your monthly expenses from your income to calculate how much money you’ll have left to spend on a house.

What kind of debt obligations do you have? Knowing these will keep you from becoming house poor, so you don't have enough money for housing expenses. 

Example

Here's an example of how you might add up your expenses:

• Student loans: $1,000
• Credit cards: $1,000
• Car loans: $400
• Child care: $700
• Total: $3,100

3. Calculate Your Desired Home Price

Next, use the results from step 2 to calculate their estimated house price. You can use a home affordability calculator to help make this step easier.

An affordability calculator uses your yearly income, estimated savings, desired location of your future home, income and expenses to estimate your monthly mortgage payment. Note that it's just an estimate, and changing mortgage rates or a larger down payment can affect your costs.

Example

Let's look at an example of how to calculate a desired home price using the net earnings and debts listed above. Add up your monthly debt and divide that amount by your gross monthly income.

Income: $5,000

Debt: $3,100

$3,100/$8,000 = 0.3875%

In this case, your debt-to-income (DTI) ratio is 0.39%. Consider how you might organize your income and debt to add a house payment to it.

4. Determine Your Down Payment

Figure out the down payment amount based on the price of homes you’re interested in. The type of home loan you decide to use will affect the amount you put down for a down payment as well. For example, if you opt for an FHA loan, you'll need a down payment of at least 3.5%. While a conventional loan requires a minimum 3% down payment.

If you want to avoid paying private mortgage insurance (PMI) on a conventional loan, you’ll need to save at least 20% of a home’s purchase price for a down payment.

Example

An example of a 20% down payment for a $400,000 loan would be $80,000.

5. Add Your Estimated Closing Costs

How much might you expect to pay in closing costs? You'll need to pay closing costs along with your down payment. As mentioned before, a down payment typically runs between 3% – 6%. Down payments typically include many different types of fees, which can include:

• Application fees
• Appraisal fees
• Attorney fees
• Home inspection fees
• Origination fees

Example

A quick example might look like this. Let's say you plan to buy a house worth $400,000. Your lender may charge you between $12,000 – $20,000 in closing costs. 

6. Track Your Spending

Consider using a budget to track spending and saving for a down payment. A budget can help you set aside money for future repairs and maintenance. Understanding your recurring monthly housing expenses can help you plan your home budget.

Example

Look at the recurring expenses you'll face once you own your home, such as:

• Utilities
• Homeowners insurance
• Maintenance
• Property taxes
• Homeowners association fees
• Learn the estimated costs for these things to know your "all-in" costs.

7. Apply For Preapproval

Next, apply for preapproval. A preapproval letter is like an initial approval – lenders look at your income, assets and credit score to determine how much you can borrow and what your interest rate might be. Note that it is not set in stone, but it can strengthen your chances of getting an offer accepted because it's a good sign in the seller's eyes and can help you stand out among others who don't yet have preapproval.

Example

When you discover a home you may want to purchase, you let the seller know that you're preapproved for a mortgage. A preapproval gives an indication of what you can afford to pay for a home and adds credibility. You may hear of a prequalification, which isn't as solid of a guarantee as a preapproval, because it doesn't check your credit. In the case of a preapproval, your lender has verified your financial information.

House Budget Tips

Here are some budgeting tips for home buyers and homeowners:

• Buy a fixer-upper: Spending less on a house can help you budget for a down payment and closing costs. A fixer-upper may be cheaper than a brand-new home or a home in a fancier neighborhood but remember that the costs to renovate might not end up saving you a lot of money in the long run. Ensure you know your total costs before you go this route.
• Use a first-time home buyers program: First-time home buyers programs often offer more than what meets the eye, including down payment assistance, closing cost assistance, first-time home buyer loans and education and tax credits.
• Pay off debts: Paying off debt can help boost your house budget. For example, if you wipe out your $5,000 credit card balance, you could put the amount you're paying toward credit cards toward your closing costs instead.

The Bottom Line

Budgeting home expenses can be done – and should be done – before home buying. Homeownership comes with many financial responsibilities but note that your monthly mortgage payment will include some of the expenses, like homeowners insurance and taxes.

It's a good idea to apply for a mortgage before you look at home, so both lenders and sellers (and real estate agents) will see you as a serious buyer.