1. Budget for new or changed expenses
New homeowners are often surprised by the costs of owning property. To prepare, create a budget to determine what you can afford to spend on the total monthly home payment. Your home search and mortgage process help you gather more information on these extra costs so you can revisit your budget and calculations.
What to do now
Decide how much you can afford to spend on a total monthly home payment
- Your total monthly home payment includes mortgage principal, interest, property taxes, mortgage insurance, homeowner's insurance, supplementary insurance (such as flood insurance), and homeowners’ association fees. Some expenses like taxes and insurance can go up over time.
- Remember to budget for home maintenance, repairs, and utilities (such as electricity, gas, internet, water, and sewer). These expenses can be significant and vary widely depending on local utility rates, climate, and home characteristics such as size, building code, and energy efficiency.
- Think about how your budget will change once you have bought your home and decide how much you want to save each month for emergencies and other goals.
What to know
Many homeowners pay their property taxes and homeowner’s insurance bundled into their mortgage payment
This arrangement is done through an escrow account. An escrow account holds the money you pay monthly, so that you won’t have a big expense all at once. If you do not have an escrow account, you still have to pay these costs. Your lender might require you to have an escrow account to get a mortgage or could charge you extra not to have one.
Homeowner’s insurance is generally required for a mortgage and additional insurance can be required
Homeowner’s insurance pays for losses and damage to your property if something unexpected happens, like a fire or burglary. Floods can cause significant damage and are generally not covered by a homeowner’s insurance policy. If you purchase a home in a FEMA designated Special Flood Hazard Area, you are likely required to buy flood insurance. Damaging floods also happen outside these zones. Fire, wind, and other hazards can also cause damage. Before you buy, look up the property’s disaster risk. Buying property in a risky area likely means searching harder and paying more for homeowner’s insurance and flood insurance. You might have to make upgrades to the home to quality for better insurance rates. Insurance costs and repairs should be included in your budget.
2. Determine your down payment
Now that you have a good sense of what you can comfortably afford each month, it’s time to look at your savings and determine how much you can afford for a down payment.
What to do now
Consider how much you want to and can afford to spend upfront
Watch our short video to see what to consider when choosing how much to put down, then determine how much money you can afford to spend upfront.
- First, calculate your total available savings and investments. Subtract from this any money needed for other savings goals, moving costs, renovations, furnishings, or as an emergency cushion (usually three to six months’ worth of expenses). This is your maximum available cash for closing.
- Next, estimate costs to "close.” Typically closing costs range from 2% to 5% of the home purchase price (not including your down payment). However, your actual closing costs depend on the price of the home, your down payment, lender costs, type of loan, type of home, and location.
- Finally, subtract your closing costs estimate from your maximum available cash for closing to determine your maximum down payment.
What to know
Your down payment amount affects how much you can afford
If your down payment amount is less than 20% of your target home price, you likely need to pay for mortgage insurance. Mortgage insurance adds to your monthly costs. You may need to reduce your target home price accordingly if you plan to put less than 20% down.
Low or no down payment options might be available to you
Many programs can help you buy a home with a small or no down payment. Low-down payment options can mean higher costs over the life of the loan. When you meet with lenders, ask questions and ask to see multiple choices.
Look into what programs you might qualify for:
- Federal Housing Administration (FHA) loans require as little as 3.5% down payment with flexible credit requirements. There are also special programs for veterans and servicemembers, rural residents, some first-time homebuyers, and others.
- Conventional loans backed by Fannie Mae or Freddie Mac can require as little as 3% down payment. Individual lenders can also offer their own special low- or no-down payment options.
- You could also qualify for a down payment assistance program through your state or local government, or through a nonprofit. Contact a local housing counselor or explore programs in your area .
How to avoid pitfalls
Give yourself a cushion and keep in mind your other savings goals
At this stage, none of the numbers you are working with is precise. It’s a good idea to give yourself a cushion in your estimates, so that if your costs turn out to be higher than expected, you’re not left scrambling for money.
3. Decide how much you want to spend on a home
Once you know your estimated down payment amount, monthly budget for housing, and one of your credit scores, you can use our online tool to figure out what interest rate you might expect to pay for a mortgage. This lets you get a realistic estimate of the home price range that you can comfortably afford. Revisit this section to update your estimate as you gain more pieces of information.
What to do now
Calculate a basic estimate of the home you can comfortably afford
Many mortgage calculators are available online. To use Freddie Mac’s free Homebuying Budget Calculator , select the dropdown under Loan & Borrower Info to calculate affordability by payment. Then, enter your monthly budget for housing and your estimated down payment, and use the default interest rate. The calculator shows an initial estimate of how much house you can afford.
Use the information you gathered to check what interest rates you can expect
Explore the range of interest rates using this tool. You might not have all the information yet about what type of loan is best, but you can always revisit these tools once you have more information. In the Explore loan choices phase, you'll find out more about different options for your loan and how to get the best overall deal for you.
Modify your initial estimate based on what interest rates you can expect
After you have an approximate interest rate, go back and modify the interest rate in the Homebuying Budget Calculator to calculate a new estimate of the home you can afford. Interest rates depend on the loan amount and change over time, so this is only a rough estimate. The amount you can afford ultimately depends on five key factors, described below.
What to know
The home price you can afford depends on five key factors
Change any of these five factors, and you may be able to afford a more or less expensive home:
- How much you can pay monthly, considering other monthly costs such as auto and student loans, credit cards, etc.
- How much you can pay up front in a down payment
- The kind of loan you get, for example a 30-year fixed, 30-year adjustable, 15-year fixed, etc.
- The interest rate and terms of your loan
- Property costs such as property taxes, homeowner’s and flood insurance, utility and maintenance costs, and HOA fees.
