What You Need Before You Buy a House

Make these financial preparations before you start hunting for your dream house.

If you’re a first-time house buyer, it’s easy for visions of your ideal home to crowd out practical considerations like hidden costs. Make sure you understand what you’re getting into financially, from your mortgage payment to the principal, interest, taxes and insurance (PITI).

Take It for a Test Drive
“Add up what it will cost you every month and take it for a test run for six months,” says Mary Hunt, author of 7 Money Rules for Life. “If your current rent is $1,500 but your PITI is $2,500, put an extra $1,000 into a special bank account to see if you can really make those monthly payments.”

That money you’re setting aside will come in handy if you decide you’re ready to buy. Hunt recommends making a down payment of 20 percent, which is $40,000 on a $200,000 house. The more you put down, the lower your monthly payments will be.

Check the Additional Expenses
During the purchase process, ask what your closing costs will be.

“People who have saved or borrowed $40,000 for a down payment are sometimes shocked to realize they really need $50,000 because of closing costs,” says Hunt.

Also, while you’re negotiating the home’s selling price, bargain for the money you need to make necessary repairs. For example, if the windows need replacing, get an estimate of the cost and reduce your offer to the seller by a little more than that amount.

If the sellers won’t bargain and you don’t already have cash on hand, Hunt suggests living in the house for a while to save up money for renovations. “You don’t want to go into even more debt,” she says.

Keep Funds in Reserve
Whether you’re buying a new home or already settled in, Hunt emphasizes the importance of always having a home emergency fund. She recommends calculating your total monthly expenses and keeping six months’ worth in a savings account you don’t touch.

“This isn’t for going on vacation—it’s in case the electrical system in your house needs unexpected repairs,” Hunt explains. “Remember that even a brand-new home isn’t going to be trouble-free.”