Up Front Costs are a Killer

When I first thought about buying a house, my thoughts didn't immediately go to how much this was going to cost up front. I mean, I knew I would need the down payment, and that this was going to cost me anywhere from $15-20K minimum, but mostly I was preoccupied, and I still am for that matter, with how much house Nicki and I can afford. I have been on just about every mortgage affordability calculator I can find. Each time I type in our specific parameters and it spits out a number, and then I fiddle with the max debt-to-income ratio, and it spits out a bigger number, that I like a little more.

For those of you who don't know anything about debt-to-income ratios, and the other monthly costs I suggest you do some googling like I did. But to give you a rough overview, the debt-to-income ratio is the amount of money you spend each month on your debt compared with how much money you make pre-tax. When you get a mortgage loan for your house, lenders usually prefer that your monthly housing costs are less than 28-29% of your total pre-tax monthly income and that your total overall debt obligations (car, housing costs, student loans, credit cards etc.) are less than 36% to 41% (FHA allows for a slightly higher debt-to-income ratio than conventional financing). These are the main  numbers that a mortgage affordability calculator is using to compute how much house you can afford.

But one area where the mortgage affordability calculators, and the majority of the internet for that matter, is lacking in information, is how much buying a house truly costs up front at the closing. I'm not going to pretend that I know how much this is going to be either. Apparently, it varies by state, county, city, bank, and price of house. From estimates I've been able to scratch together from the various forums I've been obsessively reading, closing costs in my area are going to range anywhere from $15-25K. If you are an observant reader, you'll notice that this is the same amount of money that I was planning on using as a down payment. Needless to say, I was not a happy camper when I discovered that I will have to save up double that amount of money to pay in fees, taxes, and insurance at the closing.

The other "up front cost" is not really a cost so much as a safety net, but it still involves saving cash to have on hand, this is your emergency fund. According to the internet, smart financial people recommend having at least 6 months living expenses saved up in an emergency savings fund, so that if something goes terribly wrong, (read: you lose your job), you will still be able to pay your mortgage and expenses. Lets see, 6 months of living expenses that's another $30K or so.

 So, to sum this up, if you are looking at about a $350-$400k house in New York like we are, then you'll need at minimum $15k (this assumes an FHA loan down payment amount of 3.5%), add to that the potential $25k in closing costs, and the $30k emergency fund and that totals $70k cash to have on hand to buy a house. I don't know about you, but I'm a little terrified of that number. I have a feeling there is going to be some Ramen noodles in my future. Now let the budgeting begin...