Budget Management for New Homeowners
Are you getting ready to purchase a new home? Congratulations! Becoming a homeowner is one of the most exciting - and empowering - feelings. You're achieving the American dream. And, in the San Francisco Bay Area, mortgage payments are commonly less than market rents, which means extra money in the bank each month. You may also find you save money each year at tax time because you get to deduct your mortgage interest and property taxes - the total of which is always more significant than any renters credit.
However, budget management is still important because homeownership means you're responsible for new expenses.
NOTE FOR SOON TO BE HOMEBUYERS: If you're reading this before your loan funds and the close of escrow (COE), keep credit card balances as low as possible and resist making any significant purchases that could cause lenders to be wary. Lenders want to see financial health improve between the loan preapproval process and escrow closing. They scrutinize everything in those days leading up to the sale and can refuse to fund the loan if your credit-to-debt ratio, credit score, or bank account balances take any notable dive.
7 Ways to Maintain a Healthy Budget After Buying a New Home
Once you're in your new home, take stock of the money coming in and out. If there is extra, make sure that you save a reasonable portion of that based on your new budget.
Here are some essential budgeting tips to ensure you remain on the positive side of the cash line as a new homeowner. A healthy savings account means invaluable peace of mind, knowing you have the resources to handle unanticipated financial situations.
1. Anticipate new expenses associated with home maintenance
If you've purchased an apartment, condominium, or townhome, much of the exterior maintenance will be taken care of by the homeowner's association (HOA) or management team. However, homeowners are responsible for repairs or issues with the interior of their units. Planning for homeowner maintenance and typical lifetime repairs is part of budget management. We recommend purchasing an additional homeowner’s insurance policy specifically designed to cover the interior portions of your unit that exist outside of the HOA’s building coverage.
As a homeowner, there's no landlord to call when electrical outlets don't work, toilets backup, or repair costs on appliances. You're on the hook for whatever isn't covered by the home warranty. You also need to perform annual maintenance on the HVAC system to keep it in good working order and protect its warranty.
The National Association of Homebuilders reports homeowners spend an average of $1400 to $2300 per year on general maintenance (depending on the size of the home). Ensuring you add at least $1500 to the savings account each year makes it easy for homebuyers to absorb those costs.
2. Don't forget that HOA fees go up over time
Unlike a fixed interest rate on the home loan, homeowner's association fees go up over time. This can take homeowners by surprise after the first or second year.
HOA dues increase by an average of 2% to 5% each year, so it's worth budgeting for that to err on the safe side. If you are purchasing a new construction condominium, this is one of the questions to ask the developers or sales team. They may be able to narrow in on what the projected increases are.
That said, we highly recommend getting involved and being a regular HOA participant. Attend the HOA meetings and keep involved so you know what expenses are being approved and can provide input about when and how fee increases take place. Nobody wants fees to increase, but a well-run HOA only spends these fees to meet their building maintenance and other obligations.
And remember that HOA fees save you significantly on some of the most expensive aspects of homeowner maintenance costs, such as:
Roof repairs and replacement.
Exterior painting.
Common area landscaping and irrigation.
Upkeep of driveways, roads, curbs, sidewalks, etc.
Maintenance and cleanliness of available amenities.
Garbage collection.
Exterior landscape lighting and safety/security lights in common areas.
And so on.
So, what may seem like an annoyance on a monthly basis should more than pay for itself in what you save over the course of homeownership.
3. Schedule a new construction home inspection
A new construction home inspection should be done before Month 11 of owning your home. This allows inspectors to find any builder or subcontractor defects that will become your financial responsibility if they're not caught before the one-year developer warranty expires.
Your unit comes with a developer warranty that lasts for one year after the close of escrow (COE). If you detect any of the following common issues, follow their instructions for reporting customer service issues, and they’ll work to resolve them with you.
Some of the most common items found during a new home inspection include:
Rarely used outlets without electricity.
Three-way switches that don't work.
Small plumbing or other water leaks that have gone unnoticed.
Misaligned or off-track cabinet doors and drawers.
Interior doors out of alignment.
Malfunctioning door or window hardware.
Unlevel stove top.
Missing grout or caulking.
Cracks, creaks, or irregularities in flooring.
Other home repairs that should be handled by the builder.
These inspections are a small investment, and the expense almost always pays for itself; finding these items now and having them repaired on the builder's warranty is a huge savings. Just one month after the warranty period and the combination of unaddressed repairs could cost you thousands.
Also, your developer may offer the ability to renew the warranty terms for a reasonable price. Ask the sales office for more information on how best to warranty your new unit.
4. Save enough for an emergency fund
As a renter, you're very protected by California Tenant Laws and Bay Area Housing programs that provide assistance to renters experiencing tough times - especially when the instance directly relates to emergency scenarios supported by governmental policies (for example, harsh economic downturns, pandemics, etc.).
Home budget advice from financial experts always includes having an emergency fund. Over time, experts recommend saving enough to cover six months of your basic expenses (mortgage payments, utility bills, minimum payments on credit cards, health insurance, car payment and auto insurance, and other payments associated with basic living expenses).
When you do the math, you'll see why a frugal homeowner is a wise homeowner. You never want to risk losing your home or not being able to make your mortgage principal. Regardless of the scenario, the banks can take your home back if you default on payments.
5. Get a life insurance policy if you don't have one already
It may seem odd to recommend spending more money each month in a post that advocates increasing balances in savings accounts and reducing excess spending. However, life insurance is a must for anyone who relies on someone else to make the monthly mortgage payment.
As a title holder, you're responsible for making that payment regardless of what happens to the other person or people on the title - or their earnings. If a person dies unexpectedly or due to a terminal illness, life insurance coverage can pay all or a portion of the remaining mortgage principal. OR, you can put the total payout in a high-interest savings account or money market fund to reduce your portion of the payment.
6. Be savvy when shopping for insurance
Your home insurance carrier is not set in stone, nor is the carrier of your auto insurance policy. Be savvy, and don't be afraid to shop around. If you're able to find lower auto or homeowners insurance rates, make the call.
Just be sure to connect with the mortgage lender before changing your homeowner's policy to verify the new policy aligns with their rules and regulations. Depending on your loan type, the lender may have a rule about using approved carriers, the type of insurance you have to have, etc. Don't forget to insure any upgrades or home improvements that increase the property value.
However, shopping around for the most affordable insurance quotes can save you hundreds of dollars per year.
7. Get creative around ways to tuck extra money away
Having a hard time figuring out how to put extra money away and live within your income? Here are some steps to put more money in your bank accounts each month.
Try not to use the entirety of your savings for the down payment
Did you know there are assistance programs to help qualifying individuals make their down payments? Whenever possible, we recommend putting the minimum amount down on the unit to keep some of your savings in the reserves.
Having a nest egg available after you've purchased a home can be a lifesaver when life's unforeseen events show up. Speak to your real estate agent or finance professional about how to balance the best down payment amount with current savings and assets. You may find that putting a little less down is a better business decision because it leaves you more cash available if there's an emergency.
Set reasonable savings goals each month
You don't have to put money in your bank accounts right away. Instead, set realistic savings goals you can keep. Come up with a number that makes sense but leaves you enough to have a little bit of pocket money for affordable treats from time to time.
If you make your savings goals unreasonable, they'll be harder to reach, and that can make you quit altogether.
Save the difference between your former rent and current mortgage
If your experience mirrors many first-time homebuyers, your mortgage is less than the rent you used to pay. Try to maintain your former budget and reap the benefits of dividing the savings in a way that positively impacts your financial bottom line. Think about how much should go into the emergency fund, paying off remaining credit card debt, purchasing a life insurance policy, or paying off student loans a little faster.
Don't forget that, low-interest or not, student loans eat into your monthly income. See if you can pay them down a little faster, and then you'll have more money to add to the emergency fund.
Always look for better deals
Budgeting for beginners requires honing your inner bargain-hunter skills. Always shop for better deals when making any purchase, and avoid impulse buys. If you're an impulse buyer, we recommend reading Bank Rate's post, 5 Ways to Avoid Impulse Buying.
We mentioned looking for better deals on homeowners insurance (which can alter your mortgage payment, saving you money). But that same principle can be put into place with all purchasing decisions.
Keep a look out for better prices via:
Changing your utilities providers if you have options.
Offers from your internet provider (if you hear of a new offer better than your price, ask if they'll honor that in reward for being a loyal customer).
Prioritize sales or reduced-priced days (if you’re 60+, local grocery stores and other businesses may offer 10% off days to qualifying buyers. If so, take advantage of them).
Talking to store managers about price matching - including price matching for online deals.
Shop for lower auto loan rates when it's time to purchase a new car. Even the difference of a half of a point can save thousands over the loan term.
Don't forget about refinancing options.
Your mortgage payment is a compilation of multiple factors - purchase price principal, interest, taxes, and insurance (mortgage insurance [pmi] and homeowners' insurance). This compilation is referred to as the PITI. Anything that lowers one of these things alters the total payment.
Right now, interest rates are higher than ever. This means that mortgages are higher than they were when you were house hunting for homes in the same price range. Once interest rates go down, the idea of refinancing makes sense.
Depending on your financial situation and the difference between mortgage rates, refinancing the loan can save you tens of thousands of dollars over the course of the loan. Just as you can shop for insurance carriers, you can also shop for deals from different mortgage lenders or brokers. Some may offer additional adjustments in price via points (reductions in interest percentage points) for extra savings, so do your research to get the best deal. However, be prepared to pay closing costs - just like when you purchased your home - which can be typically rolled into the total loan price.
Consider other sources of income
We recommend waiting until after your close of escrow to increase your income as making too much could compromise your ability to qualify for the BMR purchase. However, once you’re officially a homeowner, there may be additional ways you can make an income. For example:
Are there side jobs you can take on to pad the coffers? Now that you're a homebuyer, a lower income may not benefit you in terms of low-income housing perks. This might be the right time to take on a part-time job or a full-time job that pays more money.
Do you have things of value you never wear or use? You might surprise yourself by how much you've earned after selling things cluttering up your space anyway.
What other services can you offer on a part-time or flexible basis? Think outside the box. People in San Francisco are always looking for services like transportation, pet sitting, dog walking, intermittent child minding, meal support, etc. You may find that doing a few odd jobs per month helps to eliminate existing debt or add more money to your retirement savings.
Plan for what you'll do with student loan payoff savings
If you're paying off student loans, there will be a day when they're finally paid off, and that monthly payment is yours again. According to the City of San Francisco, Bay Area student loan borrower payments average nearly $400 per month. That's a significant amount of money.
Since you're already used to including it in the budget, speak with a fee-based financial planner when you're close to paying it off. They can take a look at your list of credits and debits and then let you know the best way to put that money to use once those payments are yours again.
You deserve to celebrate, so keep a little of it for yourself in the "fun money" bracket, but continue putting the rest of it away in the way that serves you best, depending on your age and future income potential.
Have Questions About New Homeowner Budgets Before & After The COE?
The team at 400 China Basin is here to help. Our project is dedicated to helping low, moderate, and middle-income earners purchase their own homes in the beautiful Mission District of San Francisco. However, we know buying a home is only the first step.
Ultimately, everyone who buys a home continues benefitting the more they improve their financial health. Contact us to learn more about buying a home, the programs you can use to get you going, and connections with buyer advocates and professional housing counselors who can give you personalized recommendations and expert information about budgeting, saving, healthy money management practices, and how to increase your wealth through ownership.
