Buying your dream home is exciting – but before you start making offers, it’s important to understand what you can realistically afford.
The amount a lender approves for you isn’t always the amount you should spend. Taking a closer look at both upfront and ongoing costs can help you make a more informed decision.
Why affordability matters
The first step in buying a house is knowing how much you can afford. Just because you’re approved for a certain amount doesn’t mean it fits your budget. Lenders and banks – and even a lot of real estate agents – are generally looking out for their own best interests first.
Lenders focus on your credit, income and ability to repay the loan. But only you can determine how much you’re comfortable paying each month and how much financial flexibility you want to maintain. Your budget – not your lender – should guide your homebuying decision.
Upfront costs of buying a home
Before you start paying a monthly mortgage, there will be some costs you’ll need to pay upfront:
- Earnest money. When you find a house you want to make an offer on, you’ll be expected to provide money along with your verbal offer. Earnest money is a good-faith deposit that shows the buyer you’re serious about obtaining financing. How much you’ll pay in earnest money will depend on your housing market, so you’ll want to check with your realtor or real estate agent. A good rule of thumb is to plan on about 1-2% of the purchase price.
- Down payment. If you’re pursuing a conventional home loan, you’ll be expected to put a chunk of money down when you buy the house (i.e. if the home price is $200,000 you can’t take out a loan for the entire $200,000). The rule of thumb for a down payment is that you should put down 20 percent of the purchase price. However, this amount will vary based on your credit score and your lender. Plus, if you are a first-time home buyer or a veteran, there are home loans available that require smaller down payments.
- Closing costs. These are all the administrative fees and expenses that go along with the purchase of the home (like attorney fees, appraisal fees, underwriting fees, title search fees, etc.). Generally, the buyer and seller split closing costs in some way, but you can make the payment of closing costs part of your purchase negotiation – either asking the seller to pay closing costs or offering to pay them to sweeten the deal. Plan on total closing costs being at least 3% of your home’s purchase price (but they can be as high as 7%, depending on the deal you work out).
If you do the math, these three categories could add up to nearly 1/4 of the purchase price. Be prepared!
Monthly homeownership costs
If you don’t have a budget, you’ll need to list out your regular monthly expenses (phone, car, loans, debt, groceries, etc.) and then compare that to your regular monthly income (after taxes). How much of the amount left do you feel comfortable putting toward a mortgage payment?
Keep in mind that you’ll want to budget not only for the mortgage but also for insurance, potential homeowner association (HOA) fees and taxes. Once you decide on an amount you feel comfortable with, you can use home mortgage calculators or talk with a lender to see how much home you can afford with that sort of monthly payment.
Hidden and ongoing homeowner costs
If you’re a first-time homebuyer, certain expenses can sometimes come as a surprise – there’s not going to be a landlord to fix a leaking faucet or a yard service to mow the lawn and plow your driveway. When you own a home, all that is on you – and it comes with costs. You’ll want to make sure you aren’t stretching yourself so thin with your monthly payment that you can’t afford things like insurance, yard work costs, utilities, any unexpected repairs, etc.
Take all this into account as you move forward and you’ll be in a much better place to find the home of your dreams that’s also in your budget.
How to determine what you can afford
To find a comfortable price range:
1. List your monthly income (after taxes)
2. Subtract fixed expenses (debt, bills, essentials)
3. Decide how much remains for housing
4. Use mortgage calculators to estimate price range
This approach helps you balance homeownership with other financial goals.
Your dream home should feel like an opportunity, not a financial burden. By understanding upfront costs, monthly payments and ongoing expenses, you can make a smart, informed decision that works for your budget and your future. Take your time, ask questions and choose a home that supports your financial well-being.