How Much House Can You Afford?

Shopping for a home can be thrilling, especially when you begin the home search and discover hundreds of options. Before you get too excited though it’s important to ask: how many of those homes can you actually afford? The answer will be your key to finding the perfect home.

Begin With Basics

Determine a starting price range by looking at your monthly budget to find a payment you can comfortably make. You won’t want to have a payment that eats up the majority of your budget as home ownership does come with additional costs such as repairs,maintenance, etc. Do consider any potential changes to your income, your other financial obligations and what you will have available for a down payment. You’ll also want to factor in the additional costs for closing and moving.

Understand Mortgage Lenders

One approach mortgage lenders use to decide how much to lend you is the “28/36 rule.” It can be broken down as follows:

• Your mortgage payment, including taxes and insurance, shouldn’t be more than 28% of your total income before taxes.
• All debt —including car payments, credit cards, student loans, utility bills and, of course, your mortgage payment —shouldn’t exceed 36% of your income before taxes.

This is just one approach as each specific situation will be different. Lenders also look at your income sources, credit score, debts and assets, and make decisions for each individual scenario. Also, just because you lender approves your for a  $500,000 loan doesn’t mean you should borrow that amount. Consider your other expenses carefully too.

Examine Debt: Present And Future

To calculate the kind of home you can afford today, you consider current debts and other potential life changes that lie ahead. New cars, major medical expenses, childcare or college tuition costs should be anticipated to the best of your ability.  Recognize where you stand with retirement savings and other future expenses. Taking the time to look at the big picture of your finances can help prevent regret later.

Also, it’s important to review your credit scores and address any issues you may find. It is possible to secure home loans with low credit scores, but any steps you can take to improve your score could impact your overall rates. 

Understand Homeownership Costs

It’s easy to get excited about buying a house and tempting to buy one at the top end of your budget. But the last thing a homeowner wants to do is become stretched too thin immediately after moving. One of the most commonly overlooked expenses with a new home is the cost of the move itself. A new house often means additional purchases such as new furniture, appliances,and other upgrades. Monthly utilities and ongoing home maintenance need to be considered. Finally,  homeowners insurance and property taxes are two more significant costs to put into your budget.

Private Mortgage Insurance

Private mortgage insurance (PMI) is another cost that homebuyers often overlook. If your down payment is less than 20% of the purchase price, PMI is likely required. PMI costs vary among lenders, usually from .3% to 1.5% of your total mortgage amount. That means with a $250,000 loan, you’ll pay an additional $62.50 to $312.50 per month. That’s a large difference in cost so you will want to consider the PMI rate when comparing lenders. If your down payment is at least  20% of the purchase price, or you’re using a VA loan, PMI won’t be necessary.

Interest Rates

Your mortgage interest rate greatly impacts your monthly payment and your total cost over the duration of your loan. In other words, you want the best possible rates. Credit scores of 740 or higher usually qualify for a lender’s best rates. Another consideration is if your budget can support the higher payment of a 20-or 15-year mortgage rather than the popular 30 year option. Not only can you receive a better interest rate, but you will save on interest over the life of the loan and build equity faster.

Be Informed

Buying a home requires careful education, calculation and an attitude of caution. Try to educate yourself as much as possible about the homebuying process and thoroughly examine all your choices. Ask your real estate agent and your lender any questions you have, letting their knowledge and experience work for you. Properly armed with information, you can find a great home you can comfortably afford.

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