1. How much home can I really afford?
When it comes to how much home you can afford, don't forget to include all of your monthly expenses, not just the things you have purchased on credit. This should include things such as groceries, dining out and entertainment, home maintenance, gas, and auto insurance and maintenance to name a few. A good ballpark guideline is not to spend more than 2.5 times your annual household income on a home.
2. How much will I need for a down payment?
The minimum down payment required for a loan is 3.5% with a FHA loan. Typical down payments can go up to 6% of the purchase price. If you can afford it, putting 20% down is ideal. You should be able to get a better interest rate, you won't have to pay any mortgage insurance, and you will already have built-in equity. You will also have a lower monthly mortgage payment because of the lower loan amount.
3. What about money for closing costs?
Don't forget about additional fees for closing costs. Earnest money of 1% is typically required as soon as an offer is made on a home. Other closing costs will range from 2% to 5% of the purchase price. In a buyer's market, it is typical to ask the seller to pay part or all of the closing costs. Other expenses include $300 to $500 for a home inspection and $350 to $450 for a home appraisal. In addition, you will incur moving costs, and need to pay for setting up your new utilities.
If you are buying a newer home, you also will have to account for other expenses such as window coverings, appliances such as a refrigerator and/or washer and dryer, and any additional furniture or accessories. Typically if you are moving from an apartment, you will need additional furniture to fill the home. On the exterior, you may need to account for landscaping the front and back yard, or installing any walls or fencing.
If you are buying an older home, you need to consider the expense of replacing the a/c unit and water heater sooner than you would a newer home. Some things like the dishwasher may need to be replaced, in addition to water and light fixtures. Flooring also may need replacing, and the interior as well as the exterior of the home may need to be painted.