Planning for Your Home Purchase

March 27, 2025

By Ashleigh, K-Staff

Home Loans, Insighter

Buying a home is a significant financial commitment, and understanding both the upfront costs and long-term responsibilities is key to making your dream into a reality.

Debt-to-Income Ratio

Your debt-to-income ratio (DTI) is calculated by dividing your total monthly debt payment by your gross monthly income. Most lenders prefer that your total monthly debts including your estimated mortgage payment not exceed 36% DTI. This can vary depending on your situation – if you can make a larger down payment (over 20%) and have little additional debt, some lenders may be willing to work with a higher DTI.

However, just because you are approved for a particular loan amount doesn’t mean you can comfortably afford it. DTI doesn’t consider non-debt-related expenses like health insurance, groceries, childcare, transportation, or personal spending. Assess your complete financial picture before making a home purchase and make sure it aligns with your long-term financial goals. A home should enhance your life, not entrap it.

Saving for a Home Purchase

When buying a home, there are several upfront costs to consider beyond just the mortgage. Plan ahead and understand what to save:

Down payment: Your largest expense, typically 5-20% of the home’s purchase price. If you can manage a 20% down payment, you’ll avoid the cost of private mortgage insurance (PMI), which can save you hundreds of dollars per year.
Closing costs: These can total between 2-5% of the home’s purchase price and include:
Loan Origination Fees (the cost of processing your application)
Legal Fees
Inspection, appraisal, and title search fees
Escrow deposits
Title insurance fees

Some closing costs can be rolled into your mortgage or negotiated with the seller.
Cash Reserves: Many lenders require that you have at least two months’ worth of principal, interest, taxes, and insurance (PITI) payments to show you can continue to make payments in case of an emergency.
Moving & utility costs: Whether you’re hiring a moving company or renting a U-Haul, moving expenses add up. You may also need to pay deposits for activating utilities at your new house.
Home maintenance & repairs: A good rule of thumb is to set aside 1-3% of your home’s value each year for maintenance costs.

How much should you save before buying a home?

To estimate how much you’ll need, start by determining what you can afford. A common rule of thumb is that your home should cost between two and three times your annual income – so if you earn $80,000 per year, look for a home priced between $160,000 and $240,000. This is just a starting point – other factors, like your debt, location, and lifestyle will determine what you can truly afford.

When planning your savings goal, aim to have enough for your down payment, closing costs, moving expenses, and an emergency fund. It’s always better to have too much than too little when you’re making the most important purchase in your life.

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Planning for Your Home Purchase

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