The Three Financial Stages of Buying a Home

At some point in the last few years, I went from standing in heels at a crowded bar to sitting in sweats on a quiet couch. The thought of getting ready for a night out took a sharp turn from fun to only-when-necessary and my social plans dropped in frequency.

Ruts (and wrinkles, apparently) can widen with age and the status quo starts to look pretty darn attractive. Responsibility can do that to a person.

(Don’t worry, this isn’t all doom and gloom.)

After these shifts set in, I realized something: Intention is the biggest difference between getting what I want and sticking to what I know. Growth is easy in earlier life stages. High school and college, for instance, offer several years jam-packed with new experiences and plenty of growth.

After these life stages you can either a. sit back and fall into routine, or b. decide to intentionally set big goals and reach for something higher.

I decided to choose B. (especially in regards to my finances).

Being averse to spending has made me relatively good with my finances by default. After all, with more money in reserves, checking certain boxes and reaching milestones becomes easier. But reaching financial goals as an adult is much bigger than avoiding consumer debt and padding a savings account. It requires intentional planning and decision making.

Shifting from comfortable renter to empowered homebuyer requires a mountain of paperwork and some serious planning. But as a newly minted homebuyer, I can say the process is well worth it.

Here are some ways you can get ready to tackle the big audacious financial goal of buying a home.

How to Create a Budget for Before You Buy a Home

Budgeting for the Down Payment

In order to have the necessary amount in the timeline you want, you’ll need one thing: clarity.

The home I ended up purchasing is a two-bedroom, one bath townhouse. It’s not large, but it covers our needs right now: somewhere to sleep and an office to work in. However, going this route instead of a single family home with more space meant getting clear about when we might start that next phase in life: starting a family. In other words, the type of home was a direct reflection of the type of life we were currently committed to living.

When we decided this was our pre-family, 3-5 year type of home, it was easier to figure out how much we would need for a down payment and what our timeline would be.

Before you take a deep dive into the numbers, think about these questions:

• What type of home will fit your lifestyle at the time of purchase?

• Do you plan on changing locations before buying a home?

• What is your timeline?

Once you’ve gained some clarity on the where and when you can move on to these number-based questions.

What size down payment will you need?

Barring any major life changes or job moves, you probably have an idea of the price range you would be considering. Add to this an estimated amount for closing costs. While you may land a deal where the seller pays things like closing costs on your behalf, you should plan on paying these yourself.

What type of loan might you qualify for?

Not all loans require a 20% down payment. In fact, it made more financial sense for us to do the minimum 3.5% required down payment for our loan, considering the amount of time we plan to be there.

Where are you starting from?

Saving for a home starts after other financial bases are covered, such as like creating a debt payoff plan and establishing an emergency fund. Figure out where you are and what might need to be addressed first.

How much breathing room do you have in your budget? What can be adjusted if necessary?

With your timeline and down payment estimate, you know how much you’ll need to save each month to get there. Does your budget already allow for it? Or will you need to find ways to cut back (either on your spending now, or the size and cost of the home in the future)?

Now that you know your savings number, consider doing the following:

Create a savings account for your down payment only.

This will ensure that your down payment doesn’t get mixed in with other savings goals. We opted for an online savings account that was separate from our other accounts, removing easy access and temptation to withdraw money from that account.

Make savings automatic with scheduled transfers.

Don’t let your willpower be your only driving force. Make it automatic and stick to it.

Find ways to throw in extra money (i.e. bonuses, tax refunds, etc.).

Don’t think of this as a sacrifice. Think of it as taking a giant leap forward and shortening your timeline.

Check in often and adjusting your spending and saving when necessary.

Life changes - so your saving plan should be flexible enough to do the same.

How to Create a Budget During the Home-Buying Process

I hate to be the bearer of bad news, but (at least in my case), saving for the down payment and dreaming of “someday” was easier than the part that came after.

The costs that start to be outlined when you’re smack dab in the middle of buying a home are all over the place. From application fees here to appraisal fees there, it’s easy to lose sight of what you originally planned on spending.

That’s why I was thrilled to have a down payment lower than planned and excess cash to spend on the “extras.” Because there will always be extras.

Considerations to Think About During the Home-Buying Process

What’s the state of your down payment?

If you’ve reached your savings goal, keep saving. And then save some more. If you don't need the savings to go to a down payment, it can go towards closing costs. If it doesn’t need to go towards closing costs, it can go towards your home emergency fund. Regardless of where it goes, chances are you’ll need it at some point.

What are your estimated closing costs?

Come closing day I had a lucky surprise: Our closing costs were more than $2,000 less than what we were originally told. If it had been the other way around, well, that wouldn’t have been so pleasant. Your closing costs will likely change from your original estimate. Have extra padding just in case.

What will you need to fix after you move in?

If you're purchasing a home that needs work, now is the time to figure out the costs of repairs or cosmetic fixes. This should be factored into your current budget.

Tip: Have funds liquid before closing day.

After going from a 30-day closing to a 60-day closing, we started to think the process would go on forever. Then we were told to be ready to close in less than 24 hours. When you’re depending on a transfer from an online bank, this presents a bit of a problem. (Yes, this wasn’t the smartest move on our part.)

Have your closing funds ready long before closing on your house. This will allow you to pay for incidentals beforehand and to be ready at a moment’s notice.

How to Create a Budget After You Become a New Homeowner

Becoming a new homeowner means you already successfully cleared a few big hurdles. But now you have to maintain the momentum and protect your new investment.

For me, the home buying process started with anticipation, moved to elation, and ended with a bit of overwhelm. I was fully prepared to take on the additional expenses, but getting organized with these new responsibilities seemed like a tall order. I needed to restructure both how I spent and how I managed my money. Here are a few things I realized.

Considerations to Think About Once You're a Homeowner

Your emergency fund should reflect costs associated with your home.

If you're shooting for a target of 3-6 month’s worth of expenses in an emergency fund, there’s a chance you’ll need to put more away to account for higher home-related expenses. Not only was my mortgage higher, for instance, but there were additional costs to cover should I ever be out of work.

Recreate your budget with your new expenses.

Speaking of more expenses, your budget will probably need an update as well. My new budget was adjusted to include my:

• Mortgage (which was higher than my rent)
• Insurance and taxes (pulled from my escrow account)
• HOA dues
• Additional utilities (this was previously included in rent)
• Home emergency fund

Luckily everything in our home was pretty much brand new. But continuing to put money towards a home emergency fund provides extra peace of mind. Plus, if that fund miraculously stays untouched, it can be used towards the down payment on our next home.

The Benefit of Stepping Outside Your Comfort Zone

It would have been much easier to remain a renter for all of time. Less paperwork, less responsibility, less to think about. But there was also a huge benefit to stretching my finances, reconsidering my spending, and thinking about big picture goals.

It’s not specific to becoming a homeowner. In fact, being a homeowner doesn’t make financial sense for everyone. It’s about not always accepting comfort over growth.

I still would pick my couch over the bar. But now the couch is in a home I worked hard to buy - and that’s a pretty awesome feeling.