There are three costs associated with a home purchase. Independently assess each of them. Your home purchase budget would only be as high as the lowest of these factors. So if any of them are a bottleneck, either work to resolve them or reduce your budget to accommodate the constraint

• Home price

  Determined by the maximum loan that banks would be willing to give you, without burdening yourself. Go with a home price that is the lower of the following numbers

  • 3x your pre-tax household annual income: Assuming you have good credit, banks will normally be willing to finance a loan of up to 3 times your pre-tax household income.
  • 1/2 of your net worth: Add up the values of all your investment, retirement, and savings accounts. Do NOT exceed half of this number as the value of your home to avoid putting too much of your money into real estate. In fact, 1/3 of your net worth is the sweet spot.

• Downpayment and closing costs

  • Aim to put down 20% as a downpayment: Even though there are ways to put down 5% on a house, that involves paying a higher mortgage. From the time you look to buy a house, you’d typically have 30 days to close, aim to have about 20% of the home value in assets that you can comfortably liquidate within a month.

  <aside> 💡 If you are looking to sell stocks to finance your downpayment, then selling them can come with a massive tax bill on the capital gains. Ensure you do have money to pay off those taxes

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  • Closing costs: Have about 2% of home value available in cash for closing costs and expenditures at short notice. This may be home inspection costs, last-minute repairs, etc in addition to closing costs. Closing costs are not included in the loan.

• Monthly Expenditure

  <aside> 💡 Redfin or any similar service would do a good job of estimating monthly payments

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  • Ensure that the monthly payment does not exceed 1/3rd of your in-hand monthly household income. This amount needs to cover:
    • Mortgage (a.k.a. loan payments)
    • Home Insurance (about 0.1% of home value per year)
    • Property taxes (about 1% of home value per year)
    • HOA (if applicable)
    • Upkeep: Houses typically need 1-2% of their home value for annual maintenance (Think roof repair, electrical/plumbing work, landscaping, etc)