First time home buyer budget advice

[Kipp]

Hello all,

I am looking to hopefully purchase my first home soon through a RD mortgage and I am looking for some budget advice regarding housing.  This home is in a small City so I know I will have to pay for water, sewer usage, and some from of trash service.  Other than those added items over renting, what kinds of expenses should I expect as a prospective home owner?  How much should I except the water, sewer, trash, and said other services cost?

In addition my wife and I started new positions this spring, so in general my budget has a lot of areas that I am unsure on.  If anyone of the mustachians are willing to look, I have it attached for review.  I am uncertain on some of the costs of home ownership such as maintenance and I am open for suggestions at improving other areas.  Included in my spreadsheet I have one tab for Income/Expenses and another for Debt with a timeline of just under 10 years to pay off all debt (including mortgage).  However, this can happen sooner with help and discipline.

Thanks in advance!

[jexy103]

I've never been a homeowner, but I've heard it recommended that you set aside 1-3% of the home's value for repairs and maintenance. Also, water, trash, etc, vary by area, so your best bet would be either to contact the city/county directly, or ask your future neighbors what they pay for it. Good luck to you!

[Kipp]

I've never been a homeowner, but I've heard it recommended that you set aside 1-3% of the home's value for repairs and maintenance. Also, water, trash, etc, vary by area, so your best bet would be either to contact the city/county directly, or ask your future neighbors what they pay for it. Good luck to you!

I know the rates vary for water and sewer, but I am wondering about actual usage?  I am currently in a rental with a well so I really don't know the amount of gallons I use in a month to really estimate what the cost would be.  Just wondering if other frugal city people are willing to share their experiences with water usage.  As far as trash, yea I will have to make some calls, the city doesn't have a required carrier, so I will have to explore the options there.  My budget is about 1.5% of the purchase price of the home for maintenance, so that is a good starting point I suppose.

Thanks.

[Another Reader]

Where are you living now and how are you handling the rent payment?  Do you have a budget currently?  Can you post that?  I would have a careful look at my current situation before I decided to buy a house.

Looking at your proposed budget, there is no explanation of the additional debt.  Why will that change and how is it related to the cash in lieu?

You obviously value your church and you donate heavily to it.  The amount of income going there is significant and that donation does slow your progress.  Could you cut back for a couple of years?

I see there are student loans.  In your shoes, I would try to pay those off as quickly as possible.  Those are alligators and should be treated as such.  Also, it's unclear what your retirement savings are like.  Is the $2,500 going to your pension matched by your employer?  Does your wife have a pension she does not contribute to?  I would consider beefing up the 457 and both IRA's as part of the larger financial plan.  If there is no other retirement, I would work on that now, while I was young and the power of compounding has the maximum time to work in your favor.

In summary, I would pay off the student loans, beef up my retirement contributions, look at my current spending to see if it could be cut, and consider buying a home once I had accomplished these items.

[swick]

Having just gone through this process, things are much different from renting. There will be additional closing costs when you buy such as lawyers/notary/title search etc.

You should seriously think about house and liability insurance. Budget for a home inspection (or several) Besides peace of mind and identifying houses you should run screaming from it gives you bargaining power and lets you learn a LOT about your house.

If possible be there and have your inspector walk you through everything. The hints and tips they can give you are awesome. Everything in your house will need to be replaced at some point, and you will have to pay for all of it. Besides a maintenance fund identifying those things you have to change right away or will need to change in the future should be budgeted for. Only have a few years left on your roof? Figure out how much you will need and work it into your monthly budget.

There are so many little expenses that you have to put out for as you are moving in (have you figured out how much it will cost to move) The fees associated with changing your utilities, getting a ladder or a hammer or a lawn mover - of course you can get all this stuff second hand - but if you are going from renting to owning you will probably find you just don't have a lot of the basics.

[Kipp]

Where are you living now and how are you handling the rent payment?  Do you have a budget currently?  Can you post that?  I would have a careful look at my current situation before I decided to buy a house.

Well I had a budget, but because of recent changes it really isn't accurate anymore.  I started a new job with a commute 51 miles one way (was 6 miles) and my wife graduated and started a job right out of school about 60 miles one way.  So we have to move just to save on fuel, we would just prefer to make a home purchase in the process.

Looking at your proposed budget, there is no explanation of the additional debt.  Why will that change and how is it related to the cash in lieu?

I am basically allocating 100% of my cash in lieu benefit to debt payments on existing debt.  No other mysterious debt lingering somewhere.

You obviously value your church and you donate heavily to it.  The amount of income going there is significant and that donation does slow your progress.  Could you cut back for a couple of years?

We could cut down, but, it is an item that I really do not wish to cut down.  I do reduce how much I contribute in accordance with retirement contributions, because I would give on that deferred money in the future.  But really, what is the point of wealth accumulation with no intention to share?

I see there are student loans.  In your shoes, I would try to pay those off as quickly as possible.  Those are alligators and should be treated as such.  Also, it's unclear what your retirement savings are like.  Is the $2,500 going to your pension matched by your employer?  Does your wife have a pension she does not contribute to?  I would consider beefing up the 457 and both IRA's as part of the larger financial plan.  If there is no other retirement, I would work on that now, while I was young and the power of compounding has the maximum time to work in your favor.

Ah, yes, the wife's student loans... they actually do not bear any interest until December (federal subsidized student loans) and the rate will more than likely be less than what we can secure a mortgage for.  That is why on my debt plan I go for the mortgage before the student loan.  Right now 100% of that payment is going to the car loan until payments start in December.

As for the pension, your reading it too generic.  It literally is a defined benefit pension where, after working for the employer for 10 years, at age 60 I am guaranteed a benefit for life.  My wife is not eligible to invest into a 401k until after a year and they will do some form of profit sharing (no match).  I have a 3% match for investing my 4% into the 457 plan.  My budget is based on us saving 10% of our income (and I considered the pension as savings for retirement) until debt is paid off.  But, you always come to that question if it is better to save more or pay off debt?  That is where I am sitting with the end balance in my budget.

In summary, I would pay off the student loans, beef up my retirement contributions, look at my current spending to see if it could be cut, and consider buying a home once I had accomplished these items.

I agree with paying off debt and beefing up retirement contributions.  But I feel that I can accomplish that AND purchase a home in my situation.  I have a nearly $9,000 surplus before cutting expenses and splitting this maybe 50/50 with debt and retirement would give a massive boost to both.

[Kipp]

Having just gone through this process, things are much different from renting. There will be additional closing costs when you buy such as lawyers/notary/title search etc.

You should seriously think about house and liability insurance. Budget for a home inspection (or several) Besides peace of mind and identifying houses you should run screaming from it gives you bargaining power and lets you learn a LOT about your house.

If possible be there and have your inspector walk you through everything. The hints and tips they can give you are awesome. Everything in your house will need to be replaced at some point, and you will have to pay for all of it. Besides a maintenance fund identifying those things you have to change right away or will need to change in the future should be budgeted for. Only have a few years left on your roof? Figure out how much you will need and work it into your monthly budget.

There are so many little expenses that you have to put out for as you are moving in (have you figured out how much it will cost to move) The fees associated with changing your utilities, getting a ladder or a hammer or a lawn mover - of course you can get all this stuff second hand - but if you are going from renting to owning you will probably find you just don't have a lot of the basics.

Thanks for the advice.  I actually have an offer in on a home and had it inspected and I agree it was very helpful to find items that need attention.  I believe I will have to have an escrow on the home, and I allocated $250 more a month over the cost of the loan to cover the home insurance and property taxes (property tax info is avaliable online for many homes in Michigan).  I do not have many of the little things that you refer to (lawn mower, ladder, etc).  I can get some of that stuff from either my parents or my wife's, but items like a lawn mower I know will have to be purchased.  But the cost of moving is a certainty, if the sale doesn't go through we will have to rent somewhere closer to our new jobs anyways.

[MoneyLifeandMore]

My best advice is to get less house than you think you can afford and make sure you'll still have a large cash reserve after you make the purchase. You should also make sure you're buying a house for the right reasons and not because it is simply the next step that other people have convinced you you're supposed to take :)

[Kipp]

My best advice is to get less house than you think you can afford and make sure you'll still have a large cash reserve after you make the purchase. You should also make sure you're buying a house for the right reasons and not because it is simply the next step that other people have convinced you you're supposed to take :)

Thanks for the advice.  Well it would be nice to purchase a home for starting a family, but you can do that and still rent.  I will have to see the difference between the prices of renting an apartment and purchasing the home, I know the rent may total to be slightly cheaper than the entire amount to own a home, but have to see if the time to be debt free is pushed back or not.

[Another Reader]

The additional information is helpful.  Moving is clearly necessary so the two of you can be close to your jobs.  How much will you pay for the house?  Is the item labeled Mortgage Escrow the PITI or just taxes and insurance?  If your total payment will be $700, that's very affordable.

I'm still confused by the additional debt line.  Is this the budgeted amount you will throw at the prioritized debt target?  Are you currently paying the higher amount to the car loan?  If you are throwing a large budgeted amount at debt, you are on the right track.

With a pension and a 457, it sounds like you have a stable job.  Is it with a government agency?  If your philosophy is you can cut back on charitable contributions today so you can give more later, then I would consider doing a little more of that so I would have a lot more to give later.  That would allow you to keep the current debt payoff plan and build for the future.  You also need cash savings, which you have not explicitly budgeted.  Would that come out of the $8,900 left over?

That 457 plan is particularly flexible - you can withdraw from it without penalty any time after you sever employment with the sponsoring entity.  With Roth IRA's, you can withdraw your contributions without tax or penalty.  Beefing those up today is something I would do in your shoes, at the expense of some of the charitable contributions and possibly a little of the debt payoff.

Overall, it looks like your numbers are quite reasonable, even conservative.  My only concern would be how much I would spend on the house during the first year.  There are unexpected repairs and improvements that cannot be predicted - water heaters and furnaces come to mind.  A cash cushion would absorb most unexpected costs.

[Kipp]

Ok, so I ran a comparison for renting short term until Student Loans and Car loan is paid off, and under that scenario the total time to pay off debt would move from January 2023 to March 2023.  This assumes an .75% increase in interest rate from now to May of 2016, which I believe is completely reasonable.  Mortgage price information is the same, but I am not guaranteed to find a home with the same items that we are looking for at the same price.

Under this assumption I selected a 2br apartment (because we will not delay a child due to the housing situation) in a decent area for $620 a month.  I figured in $15/mo for rental insurance.  I then took the entire difference between the mortgage escrow budget ($750/mo) and the home maintenance fund ($125/mo) and put that towards the highest interest debt first.

I am kind of disappointed, I wish there would have been a bigger savings to convince me to go the renting route.  But at nearly the same end result, I see no reason to not buy a home.  Playing with the budget some and putting an extra $500 a month towards debt (6,000 a year) puts debt freedom in April of 2020 under both scenarios.  So I can see that IF I can be more aggressive at paying debt than $20,000 after tax dollars a year, than renting becomes a better deal.  IF not, then I am better off financially to purchase the home now.  Looking at my income after taxes, retirements contributions, and giving, $20,000 is roughly 40% of my remaining income.

[Kipp]

The additional information is helpful.  Moving is clearly necessary so the two of you can be close to your jobs.  How much will you pay for the house?  Is the item labeled Mortgage Escrow the PITI or just taxes and insurance?  If your total payment will be $700, that's very affordable.

I'm still confused by the additional debt line.  Is this the budgeted amount you will throw at the prioritized debt target?  Are you currently paying the higher amount to the car loan?  If you are throwing a large budgeted amount at debt, you are on the right track.

With a pension and a 457, it sounds like you have a stable job.  Is it with a government agency?  If your philosophy is you can cut back on charitable contributions today so you can give more later, then I would consider doing a little more of that so I would have a lot more to give later.  That would allow you to keep the current debt payoff plan and build for the future.  You also need cash savings, which you have not explicitly budgeted.  Would that come out of the $8,900 left over?

That 457 plan is particularly flexible - you can withdraw from it without penalty any time after you sever employment with the sponsoring entity.  With Roth IRA's, you can withdraw your contributions without tax or penalty.  Beefing those up today is something I would do in your shoes, at the expense of some of the charitable contributions and possibly a little of the debt payoff.

Overall, it looks like your numbers are quite reasonable, even conservative.  My only concern would be how much I would spend on the house during the first year.  There are unexpected repairs and improvements that cannot be predicted - water heaters and furnaces come to mind.  A cash cushion would absorb most unexpected costs.

Thanks for the response.

Yes the Mortgage escrow is supposed to cover PITI, according running numerous mortgage calculators I believe it will be close to that given the rate.  The additional debt line is indeed a budgeted amount prioritized for paying off debt.

Yes a government agency, a school, started there in April.  Yes cash savings are not listed, we do have a balance and increasing that would come out of the remaining $8,900 as well as first time home expenses.

The home loan would be for 98,000 if the bank approves it (short sale).

[Another Reader]

You are buying a house that is not much more than your annual household income.  You are both likely to get raises over time.  If your wife decides to stay home with the kids for awhile, you can still carry the house without a problem.  You have given this a lot of thought and your numbers make sense.  In your shoes, I would make the same decision.

[Kipp]

You are buying a house that is not much more than your annual household income.  You are both likely to get raises over time.  If your wife decides to stay home with the kids for awhile, you can still carry the house without a problem.  You have given this a lot of thought and your numbers make sense.  In your shoes, I would make the same decision.

Thanks Another Reader.  It is always good to get a second opinion and be challenged to run more scenarios to see if it is indeed the best decision.

I think the home we are looking at is a bargain compared to many homes in the area.  Public records show it's last sale at $140,000 in 2005... and now looking I just noticed that utility bills are now listed in public record.  So that gives me an idea of where we will be on water/sewer, looks like $50-$60 a month (and then an independent trash service) so I should easily get under $100/mo for those budgeted expenses.