Person sitting at a table with a calculator going over their finances

How do I define my budget before buying a home?

In Buyers by Doug Phelps

First-time and “veteran” buyers must answer one key question before setting out on a home search: how much house can I afford?  This key question will help narrow down your top price on a search and also let you know what your future finances may look like.  It is often the very first step in looking for a new home and will likely determine your buying power and wish list.  As a mortgage is typically the largest line item in a household monthly budget, it is imperative that a home buyer gets to the correct number for the lifestyle they want, working in tandem with an overall budget and income level.  Below are some tips and practical steps that will help any buyer to determine the budget they have when buying a new home:

1. Take inventory of your income and expenses:

First off, you have to know where you’re starting from and what your yearly income is.  Aside from income, you also need to know what expenses you have going out.  Income determines what your buying potential is but if you have a lot of expenses, that reality is important to acknowledge.  

Bonus tip: should you include overtime and/or bonuses?  Because these income potentials vary, they should not be counted in your yearly income unless you know 100% that these will be consistent in both value and timing.  The reason for this is that you never want to base your largest monthly expense on income that is not reliable.  

Now, if you are in a commission-based occupation and your income is almost only bonuses, then that is a different story and you should find some sort of average monthly and yearly income. 

2. Determine what down payment you’re comfortable with

Aside from the monthly payment, when you first buy a home you have the option of putting down a down payment toward the purchase price of the home.  If you put down 20% or more, you can avoid paying PMI (principle mortgage insurance) and that will subtract from your monthly total.  The down payment is a one-time cost so if you’ve been saving or you have a big bonus coming, that can help you make the monthly payment lower and it may increase your overall buying power.  Again, once you know your financial situation, you can understand what percentage of a down payment makes sense. 

3. Consider determining your budget with a mortgage calculator:

Once you have an idea of your income and expenses, you should have a good idea about how much you want to spend on a monthly basis for a mortgage.  You should always include wiggle room in your budget for unexpected expenses.  The interest rate you get locked in with is also going to impact your monthly payment, so pay attention to rate changes.  A great resource for determining your monthly payment is by using a mortgage calculator from a trusted source, REColorado.  This helpful tool will help you determine what your monthly payment may be on a new home.  It includes line items that will impact your ultimate payment like: HOA fees, property tax, down payment amount, and of course the original purchase price.

Did I miss a question you may have? Are you in the market to buy or sell your home?  Call and text me at (720) 323-4176 or email me at

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