How to make a budget for buying a home

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If you’re ready to buy a home, the first thing you need to do is set a budget. A budget is more than just a price range for the home you want to buy. A homebuying budget is also a roadmap for you to understand your monthly expenses, down payment, and will help you set realistic goals. But how do you set a budget when there are so many different expenses and costs associated with buying a home? 

What goes into your budget? How much should it be? In this article, we’ll go over everything you can expect to pay for a home and how to better understand how much money you should have before you start making home offers. 

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What is a good budget for buying a house?

Many financial experts say you should spend less than 30 percent of your monthly gross income on housing. For example, if you bring home $5,000 per month, your mortgage payment should be $1,500 or less. This mortgage payment budget should include an estimated amount for homeowners insurance, property taxes and other escrowed items such as HOA dues. 

To be safe, consider adding a few hundred dollars to a house repair fund every month. In this example, that might mean spending $1,200 on your mortgage and putting $300 per month into a savings account for repairs and other unexpected expenses. 

There is no one rule for budgeting for a house. You’ll need to consider your gross household income, expenses, emergency fund, and future costs down the road. 

The best budget for a house is one well within your means so you can still afford your monthly payments comfortably. To figure this out, you have to understand what goes into your monthly payments and how to determine your expenses.

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You’ll want to budget for more than just your down payment. Set aside at least three months of your predicted mortgage, plus enough for earnest money and closing fees

What goes into your home budget

The purchase price of your home is a gateway to understanding how much the other costs associated with buying your home will end up being. For example, a more expensive home will have a higher mortgage payment, down payment, and, in most cases, higher property taxes and homeowners insurance. These are all costs you will want to predict and budget for as you settle on an ideal purchase price for your home.

Here are all the different costs associated with buying and owning a home that you should prepare for when making your budget. 

Down payment 

A down payment is the out-of-pocket cash you pay up front toward the purchase price of your home. While a mortgage loan will cover the bulk of the purchase price, most lenders require you to put down between 5-20% of the home’s value to lower their financial risk and to prove that you have the funds necessary to make such an expensive purchase.  

Some loan programs allow for down payments as low as 3%, but most mortgage loans require you to pay 20% of the home’s purchase price to avoid the requirement for private mortgage insurance. Most lenders have a policy to lend up to 80% of the home’s appraised value, which would require you to cover the extra 20%. Plus, you can avoid paying for private mortgage insurance (PMI) if you put at least 20% down. 

There are low-down payment mortgages, which make it easier to buy a home for buyers who don’t have twenty percent for a down payment. But, if you can, aim for 20% for your down payment since a higher down payment will help keep mortgage rates as low as possible when it comes time to calculate your monthly costs and avoid the requirement for you to purchase private mortgage insurance.

Underwriting fees

Your mortgage lender will charge fees that cover their costs for qualifying you for your mortgage loan, such as obtaining your credit report, processing your loan, and other required fees. 

The cost may be a flat fee or a percentage of your mortgage loan amount. While the cost varies by lender, expect to pay around a thousand dollars in lender costs plus other fees, such as title insurance and recording of your mortgage document.  


After finding a home, you will want to have a third-party expert inspect the home to make sure it’s in good shape. As the buyer, you’ll cover the cost of this inspection. Expect to pay a few hundred dollars. Note, some inspectors offer additional tests, like testing for radon, for an additional cost. 

Closing costs

At closing, you’ll make a payment to cover closing costs, which includes your mortgage insurance if you need to purchase it, homeowners insurance, property taxes, real estate agent fees, and the cost to transfer ownership of the property. In some cases, it might also include a payment to escrow for your first property tax payment. 

The amount you’ll pay at closing depends on the amount of your mortgage loan, the state where you’re buying, and whether you’ve negotiated with the seller, or any of the third-party servicers involved to bring down the costs. For example, some buyers ask sellers to cover part of the closing costs or ask their lenders to roll the closing costs into the mortgage balance. 

On average, expect to pay two to four thousand in closing costs.  Some lenders will allow you to finance the closing costs. While this increases your mortgage loan amount, it does reduce the money that you will need to bring to closing to close your mortgage loan.

Earnest money

Earnest money is a deposit you pay toward the purchase of the home that you usually pay to the seller when you sign the purchase agreement. 

Your earnest money deposit is a good faith deposit meant to show the seller that you are serious about buying the house and have no reason to think you’ll have to back out. But anything can happen between when you make an offer and close on the home. Just in case you have to back out of the contract, the seller can hold on to the earnest money deposit to lessen any potential financial damage of having re-listed the property later. 

You can expect to pay 1-3% of the home’s purchase price, though some sellers may ask for a flat rate of between $5,000 and $15,000. 

Monthly payments

How much you end up paying each month on your mortgage loan depends on the amount you borrowed, the type of mortgage loan you have, and the interest rate determined by your creditworthiness when you first borrowed and the term of your mortgage loan (15 years, 20 years, 30 years, etc.). 

Average mortgage rates in the summer of 2022 for the most popular type of mortgages—30-year fixed rate mortgages—were a little above 5%. 

Use this mortgage calculator to get a sense of how much you may expect to pay each month based on your credit score, your down payment, and how much you would need to borrow. 

Mortgage calculator: Estimate your monthly payment

All calculations are estimates and provided for informational purposes only. Actual amounts may vary.

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Remember that monthly costs may also include private mortgage insurance if you have less than a 20% downpayment, and will likely include homeowners insurance, property taxes and other escrowed items, such as HOA dues.  

Other homebuying costs to consider 

It’s important to consider all the costs when budgeting for a new home—not just those upfront costs to close your mortgage loan and regular monthly mortgage payments. In addition to underwriting fees, closing costs, mortgage payment, and your down payment, there may be a few additional costs, such as an inspection, moving truck, utility installation or deposits, and so forth. 

Make sure your home buying budget includes all the costs you’ll incur so you aren’t caught off guard. 

How to calculate your homebuying budget

It may be tempting to look at your savings account and use that to estimate the amount you’ll pay toward your down payment. But a homebuying budget should help to cover expenses beyond the first, upfront costs of buying a home. 

Most lenders suggest that you have between 3-6 months’ worth of your mortgage payment on deposit in your accounts after you close. The more you have left over, the better. That way you will have a cushion should unexpected situations arise that may impact your ability to make a timely mortgage payment.

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There are a lot of different elements to your homebuying budget. Calculating how much you’ll need doesn’t have to be an impossible task

How much can you pay each month? 

Decide how much you can pay toward your housing costs each month by subtracting your other expenses using whatever formula works best for you. Some lenders suggest using the 50/30/20 rule where 50% of your budget goes to your needs, 30% to wants, and 20% to your savings.

Whichever budgeting rule you use should take into consideration your income and how much you can comfortably spend on housing costs after everything else is taken care of. How much can you afford to put down? 

Subtract the other likely upfront costs and fees of homebuying like closing costs, earnest money, and inspections from the amount of cash savings you have. The exact amounts will depend on the purchase price of your home, but you can use the averages we already discussed. For example, you can expect to pay around $5,000 on an earnest money deposit and at least $1,000 on lender closing costs and additionally other fees such as escrow deposits, title insurance, recording, etc.. 

Then, take 3-6 months’ worth of your housing costs from that number so you’ll be sure you have a safety net of cash after you close on your home. The remaining amount is your maximum down payment. 

How much are you comfortable borrowing?

Now that you know your down payment, you can determine how much you would need to borrow for each different mortgage loan program. 

For example, if you’re using an FHA loan and are planning on paying 3% down with PMI, you will need to have a credit score of at least 580 and  be comfortable borrowing 97% of the home’s price—and whatever the monthly mortgage payment will be for that loan. If you are not applying for an FHA loan and are looking at a conforming loan, if you’d rather pay the standard 20% downpayment and avoid private mortgage insurance, your down payment amount will tell you how much you’d need to borrow to cover the remaining 80% of the purchase price. 

Deciding how much to spend on a home

Say you have $80,000 in savings. Your salary and other expenses make it possible to spend $2,000 a month on your housing costs. So, you would ideally be able to put aside $12,000 for the first 6 months of your mortgage before you ever make a down payment. 

Now, you have $68,000 left after setting aside $12,000 as a reserve for your mortgage payments. Assume you’ll have to subtract another $5,000 for earnest money and a reasonable amount for closing costs so that you are left with an amount less than $63,000 to make a down payment. Let’s say that you will have another $5,000 in closing costs leaving you with $58,000.

First you would need to determine how much of the $58,000 you are willing to spend as a downpayment.  Remember, you want to keep aside funds for repairs, emergencies, etc.  That will determine the amount of cash you have for a down payment and then determine the down payment amount you are willing to spend for homes in your desired price range.

Once you know how much of the $58,000 you are willing to put toward a down payment, you can then decide if that number will be the standard 20% down payment or if you intend to use a different kind of loan program that allows you to make a lower down payment. 

Say you want to use $50,000 for a 20% down payment. That means your maximum home price is $250,000. 

Your exact numbers will vary depending on your monthly expenses and the mortgage rate you qualify for based off of your credit score and other financial factors when you apply. But using this example gives you an idea of how to decide your maximum price for a home. Getting a preapproval from your mortgage lender will provide a budget for your homebuying process as well.

Making a budget to buy a house 

To budget for a house, start by determining your gross monthly income. Then, calculate what you can afford in monthly mortgage payments and include a cushion for the first few months of mortgage payments, closing costs, any repairs, and unexpected expenses. Don’t forget to include added closing costs, like underwriting, inspection fees, and your down payment. 

Once you have all your financials in order, you can move on to the next step in the home-buying process—finding a lender. 

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