How Much House Is Too Much? A Smarter Way to Set Your Budget

What’s your ideal home? A condo in Denver? A townhouse in Boulder? A mansion in Aspen? 

It’s good to be ambitious, but buying a home that’s a bit beyond your budget can have significant consequences. Let’s look at how you can set a practical home budget that will maintain your financial health — not imperil it.

The Consequences of Going Over Budget

At some point in your life, someone probably told you that if you can’t afford something, you simply shouldn’t buy it. That can make sense for luxury goods or electronics. But for big purchases, such as vehicles and especially property, that rule can be wildly impractical.

It’s entirely sensible to secure a mortgage to buy a home. And if a financial institution wants to loan you a certain amount of money, why shouldn’t you take as much as you need?

There are popular terms such as “house poor” and “house rich, cash poor” that basically mean the same thing: a person who owns property — though with a significant mortgage — but with very little by way of liquid assets. This means they can’t afford niceties such as vacations, fancy dinners or organic bananas. They also can’t afford to save money for retirement, their children’s future tuition or a rainy day.

When we imagine someone living paycheck to paycheck, we most often picture a renter. But many people have overstretched their finances to buy a home and are just one layoff, health incident or other unforeseen event away from serious financial trouble. In fact, a Clever Real Estate survey found a startlingly high number — 43% — of new homeowners struggle with their mortgages.

How To Budget Smarter

If you’re looking to purchase a home, how do you avoid finding yourself among that 43%? Here are some tips you can follow to establish a home-buying budget that works for you:

Use the 50/30/20 Rule

This is 50% for expenses, 30% for discretionary spending and 20% for savings. This is a healthy financial strategy that allows you to enjoy life and plan for the future. If a proposed mortgage payment (coupled with other expenses such as groceries and utilities) would equal more than half your income, it’s probably a bad idea.

Make a Strong Down Payment

Many will tell you that 20% is the minimum down payment you should apply. The truth is, many homebuyers put less than 20% down, but this is the cutoff for requiring private mortgage insurance. If you can put more than 20% down, that’s great — but don’t put so much down that you don’t have an emergency fund that can help you make a few months’ worth of payments. This is especially true if you have a reduction in income.

Budget for Closing Costs

There are many costs to keep in mind when buying a home. These may include:

• Appraisal costs.
• Attorney fees.
• Escrow charges.
• Inspection costs.
• Lender fees.
• Real estate commissions.
• A title insurance premium.

Consult a Reputable Bank

So much of buying a home relies on others’ expertise, from realtors to lawyers to bankers. If you can trust your bank to offer you a sensible mortgage* that works for everyone, you have a good chance at success. 

 Contact a Vectra Bank professional and discover how we can help your homeownership dreams become a reality.

 ^{*A division of Zions Bancorporation, N.A. Member FDIC. Loans subject to credit approval. Terms and conditions apply. Equal Housing Lender. NMLS #467014}