Are you thinking about buying a home? Current home affordability depends a lot on your local real estate market, but it’s also important to set a budget based on your financial situation.Â
“How much house can I afford?” is perhaps the most common question asked by new homebuyers. There’s no one-size-fits-all answer to this question, which is why you’ll need to explore several different factors to find your ideal price range.
Assess Your Financial Situation
Before you even start looking for houses in your area, take inventory of your present finances. What is your monthly income? What are your monthly expenses? These sorts of questions will help you understand how a monthly mortgage payment might fit into your existing household budget.
Evaluate Your Income
Start by evaluating your monthly income. Simply add up the annual income and divide by 12. If you’re self-employed or freelance, you can use the net income from your most recent tax return as your annual income, then divide by 12.
Here’s a tip: gather any pay stubs and tax records now, which will save you time when you’re ready to apply for a loan.
Create Your Household Budget
Do you use a household budget? If not, it’s time to create one. Most financial experts recommend using the 50/30/20 rule:
- 50% of your budget goes to “needs” (groceries, bills, etc.)
- 30% of your budget goes to “wants” (entertainment, meals out, etc.)
- 20% of your budget goes to savings and investments
Your monthly mortgage payments will fall into the “needs” category. So make sure that your current budget has enough room to allow for an extra payment of $1,500 to $2,000 each month. If you aren’t paying rent right now, you might want to try and put that extra money for a house payment into a savings account. That way you get used to making the payment and it helps your savings account grow.
Calculate Your Debt-to-Income Ratio
When you apply for a home loan, lenders will look at your debt to income ratio. This is the relationship between how much you earn each month and your total monthly debts. For example, if you bring in $7,500 each month but spend $2,000 on car payments or student loans, your debt-to-income ratio is 27%.
Most lenders will tell you that a “good” debt-to-income ratio is below 43%, though 35% or lower would be ideal. If you’re struggling with high debt, it may be wise to try to pay off that car loan or credit card bill before shopping for a house.
It’s easy for all of these financial factors to make your head spin. If you want a quick snapshot of how much house you can afford, just use a free home affordability calculator. You’ll get answers to top questions about home price and the amount of your monthly payments, so start today to get a clearer picture of what you can afford.
Other Factors to Consider
There are many factors to consider when buying a home. It’s tempting to clear out your bank account to make a hefty down payment, but that’s not the best idea. Here are some other costs and factors to consider when you are preparing to buy a home.
Closing Costs
When buying a home, you’ll be responsible for a small collection of fees known as closing costs. These are the administrative and legal fees that are required to purchase the home and create a mortgage contract.Â
How much are closing costs? Typically, these fees can be anywhere from 3% to 6% of your total loan amount — but that can add up. For instance, if you purchase a home for $400,000 and make a down payment of $80,000, you could be looking at closing costs of $10,000 or more. Many lenders expect these costs upfront, so make sure to have cash on hand to cover these fees.
Emergency Funds
Do you have a plan in place for unexpected expenses? Most financial experts recommend that you keep a separate emergency fund for things like car repairs or unforeseen medical bills.
Aim to save three to six months’ worth of your monthly expenses. The goal is to have a sufficient amount of savings so you don’t have to worry about dipping into your regular savings account or sinking into credit card debt to cover emergency costs.
Housing Expenses
As a homeowner, you’ll be responsible for a small list of housing expenses. This includes property tax, homeowners insurance, HOA fees, and more. Additionally, if you save money by purchasing an older home, you may need some funds to update the property or make other improvements.
If this is your first house, you may also need money for appliances or landscaping equipment. Take an inventory of what you need for a single-family home, and then work to have enough savings to purchase anything you might need to make the house truly yours.
Final Thoughts
Buying a house can be an exciting experience! But homebuyers must consider every factor to ensure that they get the house they want at a price that fits their budget. These tips are a great way to evaluate your finances as well as know what to look for when shopping for a house or mortgage program. As I tell many clients, you don’t want to be house poor!
Leslie Vanderwerf, NMLS ID#335509, CrossCountry Mortgage LLC, An Equal Housing Lender, NMLS#3029 – Email – Website