Practical & Frugal Guide To Home Buying
I bought my house with my husband when I was 21. We lived off of one income of $17,000 (yes, really). And it was the best thing we’ve ever done. But I wished that someone had written a frugal guide to home buying for me to help me navigate home buying while on a budget.
There were no resources out there for me. Nothing that could help me stay on my tiny budget while being realistic about my expectations. I want to give that to you. You can have the resources that I never had. The resources that tell you exactly what to expect when you’re buying a house, and what you need to do to make sure that you don’t get in over your head.
Here’s the frugal guide to home buying that I wish I had when I was buying my first home!
1) Establish your budget.
What will you be approved for?
There’s no sense looking at $500,000 homes if your income will only allow you to be approved for a $200,000 mortgage. A mortgage company will only give you a mortgage if your overall housing payment is 30% or less than your annual income. For example, if you make $50,000 annually, you’re likely to be approved for a $150,000 mortgage (depending on a few other factors like your credit history, taxes for the property, etc.).
What do you want to pay each month?
You might get approved for that $150,000 mortgage, but you might only want to pay $700 a month for your mortgage. Just because you’re approved for a certain amount, doesn’t mean that you need to buy a house for that amount.
Find out how much you want to pay each month in your housing payment (this will include your mortgage, taxes, insurance, HOA fees, and interest on your mortgage). There are handy tools to help you do this.
Once you’ve found your budget, establish a price range for houses that will fit into your desired housing payment. If you only want to pay $1,200 a month for your total housing payment, you know that a house that costs over $200,000 (depending on the taxes, down payment, etc.) will be pushing your limits.
Make a list of your “wants” versus your “needs”
Do you really need 4 bathrooms, or can you make do with 3? Do you need a balcony, or is a patio going to be ok?
Make a list of everything that you want in a house, and then pick your top 5 needs. You need a washer and dryer (or at least washer and dryer hook ups), you need a certain number of bedrooms, you need to be close to work. These are things that you shouldn’t even look at houses if they don’t meet these needs.
If you’re buying a house with your spouse, have them make a list of their top 5 needs too. Find a house that meets at least 6 of the overall 10 needs before you even go out to look at it.
Know the “hidden costs” associated with buying a home
Hindsight tip: there are a LOT of things to consider other than just the price of the house you’d like.
I love Zillow, but their “Zestimate” section that shows you how much your monthly payments will be is way off. While they do have a little disclaimer that says that the monthly payment doesn’t include things like taxes and insurance, even those estimates are off.
Here are some things you need to take into consideration:
Taxes – Are the taxes lower in a different location? Is there a nearby location with lower taxes that still meets your needs?
Insurance – There are a few different insurances that you need to keep in mind before buying. For all types of insurance, contact your insurance provider and ask them what the cost to insure each property will be before you buy (or even think about buying). This is important information, as this will be a recurring payment that you will need to make.
- Homeowners insurance varies a great deal in price depending on the type of coverage you have and how expensive your house is. For us, because our house is a duplex, our insurance not just needs to cover our house, but also our neighbor’s house. We didn’t think of that when we purchased, but it would be a lot lower if we were a single-family house.
- Flood insurance is important to keep in mind. Our flood insurance paid off when we had a flood in our basement 2 months after we moved in. We live in a low-risk area, so out flood insurance was about $125 annually. But if you live in a high-risk area, you might be required to have flood insurance for your mortgage. And that could run around $200+ a month depending on the risk of flood. You’ll want to know the flood risk of a home before you buy even if it isn’t required.
- Mortgage insurance is important as well. Some types of mortgages require you to carry mortgage insurance while others don’t. However, this is something to take into consideration. We pay $100 annually for out mortgage insurance in case my husband loses his job and we can’t pay the mortgage. This covers out mortgage payments for up to 1 year so that we don’t go into foreclosure. Well worth the $100 a year, I think!
“Good faith deposit” – At least, this is what it was called for us. This is the deposit that you, the buyer, put down to show the seller that you’re serious about buying the house. After your offer is accepted by the seller, they want to make sure that they’re not taking the house off of the market only to have you change your mind and walk away. The “good faith deposit” shows the seller that you have skin in the game, but it also keeps the seller honest.
Inspection costs – You’ll need to pay for inspections before you buy the house. Don’t skip on this to save a few bucks. I’d rather spend the $500 on the inspection now to know that there’s a $10,000 problem with the roof. There’s the general home inspection, the lead paint inspection, the water quality inspection, the radon inspection, and more. Many inspection companies offer all of these inspections from the same inspector.
Miscellaneous items – There will be things that you need for your new house. They could be as small as new trash cans and paint, or as big as needing to buy major appliances. These are all costs to factor into your budget or take into consideration before you buy.
Know the options for down payments.
Almost every type of mortgage requires you to make some kind of down payment. Note that I said “almost” every type.
There are some instances where you don’t have a down payment, such as financing with USDA financing. We were fortunate enough to get an FHA loan requiring only 3% down. If you’re a Veteran, you can qualify for a VA mortgage with a 3% down payment.
There are options other than a conventional mortgage. Ask a mortgage professional for what kinds of options are available to you. There’s no harm in asking, and it could wind up saving you a lot of money.
Plan for extras at closing.
Even with the seller taking on a majority of the closing costs, we still needed to bring extra money to the table. We bought our house for $82,000 and we needed $3,500 at closing. Extra costs to be aware of include things as piddly as a copying fee, the fee that the real estate company charges to have the documents printed out (yes, I mean it… they charged us to copy papers).
Usually, you can write this into your buyer agreement that the seller will pay the closing costs (since they’re the ones making money off of the sale), but sometimes they don’t cover it. Closing costs usually cost around 12% of the whole purchase. Don’t forget that this will be in addition to your down payment as well.
When I bought my house, I wished that there was someone who could understand my situation. That not all home buyers were rolling in money. I had wished for a frugal guide to home buying to help walk me through the steps to buying a house on a budget.
There are many other factors to keep in mind when buying a house. Every situation is different, as well. But these were all of the pieces of information that I wish I knew when I purchased my home.
What’s the one thig you wishes you knew when you bought your first house?