Buying your first home can be exciting, but before you start browsing properties or scheduling tours, you need to have a clear budget.
Whether you’re buying a home in Phoenix or a condo in Baltimore, knowing how to calculate your initial home budget will help you shop with confidence, avoid financial stress, and make a stronger offer. This Redfin guide will show you how to determine what you can realistically afford, from initial costs to monthly expenses to long-term planning.
Why calculating a housing budget is important
Your home budget doesn’t just determine your price range. It affects:
Which homes to focus on? How much cash you’ll need upfront? Will your monthly payments be manageable? How competitive are your offers?
Without a clear budget, buyers often experience financing surprises, closing delays, and fatigue from looking at homes outside of their comfort zone.
Step 1: Calculate your monthly gross income
Start with your gross monthly income, that is, your income before taxes and deductions.
include:
Salary or hourly wage Bonus or commission Secondary income Rental or investment income
If your income fluctuates, calculate the average over the past year or two.
Step 2: Understand your debt to income ratio
Lenders use your debt-to-income ratio (DTI) to determine how much you can borrow.
There are two types:
Front-end DTI – This only includes future housing costs.
Back-end DTI – This includes housing costs, plus other debts such as student loans, car payments, and credit cards.
Most lenders prefer:
Front-end DTI less than 28% Back-end DTI less than 36-43%
For example, if your gross monthly income is $6,000, your total monthly debt, including future mortgage payments, should generally not exceed about $2,160 to $2,580, depending on the loan program. Some loan programs allow higher DTIs depending on your credit score and other factors.
Step 3: Follow the 28/36 rule as a starting point
A common budgeting guideline is the 28/36 rule.
Don’t spend more than 28% of your gross income on housing Don’t spend more than 36% of your gross income on total debt
If your monthly income is $5,500, 28% equals $1,540. This is the maximum recommended home payment, including principal, interest, property taxes, homeowners insurance, and HOA fees if applicable.
Please note that this is a guideline, not a requirement. Comfort level is more important than reaching a certain percentage.
Step 4: Estimate your total monthly housing payment
Mortgage payments involve more than just principal and interest. Monthly total housing expense budget (also known as PITI):
Principal and interest Property taxes Homeowners insurance
You may also need to include:
Private mortgage insurance if your down payment is less than 20 percent HOA dues Flood insurance in certain areas
This complete number, not just the loan amount, determines affordability.
Step 5: Calculate initial costs
Your budget for your first home should take into account not only your monthly payments, but also your upfront costs.
down payment
Many first-time buyers make a down payment of 3% to 10%, depending on the type of loan. Some loan programs require a down payment of as little as 3%, while others, such as VA loans, may require no down payment.
closing costs
Closing costs typically range from 2% to 5% of the purchase price and may include:
Loan origination fees Appraisal title insurance Escrow fees Prepaid taxes and insurance
For a $350,000 home, closing costs can range from $7,000 to $17,500.
Moving and installation costs
do not forget:
Moving expenses Utility expenses Initial repairs Furniture/home appliances
These costs add up quickly and should be part of your total savings goal.
Step 6: Take an honest look at your monthly budget
Evaluate your current expenses before deciding on a home price.
Ask yourself:
How much can you save each month? Can you still build an emergency fund? Are you planning a big life change, like starting a business or changing jobs?
Just because a lender approves a certain amount doesn’t mean you should spend that amount.
Be the Budget’s Zach Bushnow says he recommends first-time buyers “use your lender’s approval number as a springboard for luxury goods and build a budget from the ground up based on real life.”
“Lenders don’t know your life goals: having children, taking annual leave, retiring at 50, etc. But those things determine your real financial life. If you buy below terms and give yourself some wiggle room, you can always pull up within a few years if you need to. Digging yourself out of a mortgage that’s stifling your lifestyle is a much harder problem to solve, both financially and emotionally.”
Step 7: Leave room for homeownership costs.
According to Zack, expenses that are often overlooked are small, recurring expenses that add up. Things like lawn care, metropolitan or HOA fees, minor repair costs, or a washer that floods the laundry room after six months. “I tell people to budget 1% to 2% of their home’s value annually for maintenance alone, depending on the age of the home,” says Zach. “If you add mortgage, taxes and insurance to that number and it makes you uncomfortable, that’s a sign that the house is too expensive.”
budget:
Maintenance and Repairs Landscaping Pest Control Appliance Replacement Rising Utility Bills
A general rule of thumb is to set aside 1% of your home’s value annually for maintenance. For a $400,000 home, that’s about $4,000 a year.
Step 8: Get pre-approved to confirm scope
Once you’ve calculated your comfort zone, talk to your lender and get pre-approved. Pre-approval:
See how much you qualify We’ll give you an estimated interest rate We’ll enhance your offer once you find a home
This step turns your estimated budget into a realistic purchasing range.
Example: Calculate your budget for your first home
Let’s say your pre-tax monthly income is $6,000 and you owe $400 each month.
Using the 36% rule:
36% of $6,000 equals $2,160 After subtracting your $400 in debt, you’re left with $1,760 for your home.
If your estimated mortgage payment is $1,750 per month, including taxes and insurance, at current interest rates, you may be within your target range.
Then, based on the interest rate and down payment, we calculate the home price that that payment is worth.
