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Home Buying Ratios and Costs

There are many costs that come with buying a home beyond the sale price listed. Each of these costs can vary greatly by location, type of loan, and strength of negotiations, just to name a few. Conservatively, the minimum upfront costs needed to buy a house using a low money down FHA loan would require 3.5% down payment and estimated 3% for other costs, which would be somewhere around $13,000 on a $200,000 priced home.

The quick rule that lenders use to evaluate how much house you can afford is based off 28% and 36% of your gross monthly income (what you are paid before deductions and taxes are taken out). Using the 28% rule, lenders determine how much you can pay in monthly housing expenses that include mortgage principal, mortgage interest, taxes, and insurance (usually shorted to PITI). If your yearly gross income is $48,000 or $4,000 per month, then you could afford $1,120 for a monthly housing expense (PITI) under the 28% rule.

The 36% rule simply adds your monthly recurring expenses, like credit card bills, to PITI to ensure those are less than 36% of your gross monthly pay. It is a good idea to pay off most, if not all, your debts before buying a home. For someone making that same $48,000 per year or $4,000 monthly gross income, the recurring debt and PITI could not exceed $1,440 per month using the 36% rule.

Personal finance gurus, like Dave Ramsey, and I believe the percentage should be lower to give yourself enough cushion for inevitable increases to life expenses. Dave Ramsey recommends a max of 25% of your take home pay or net pay (what you are paid after deductions and taxes). Everyone’s budget is different, so use a professional accountant or personal finance planner if you have concerns.

Use this mortgage estimator to run scenarios for your new home.

Typical Home Buying Costs

Upfront Costs Ongoing Costs
  • Mortgage fees (loan origination, points, etc.)
  • Inspections
  • Appraisal
  • Land Survey (determines boundaries)
  • Attorney fees
  • Recording fees (for deed)
  • Utility setup fees
  • Moving costs
  • MortgageEscrow (property taxes plus homeowners’ insurance)
  • Utilities
  • Home maintenance
  • Capital expenditures for when big ticket items wear out, e.g. roof and water heater

The bottom line is that you must have your financial house in order before attempting to buy a house! If you haven’t, start by creating an easy budget.


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