How many homes can you really afford to buy?
If you’re one of the many people looking to buy a home in today’s real estate market, it’s important to know your budget before you start shopping. Buying a home is often a long and expensive process, and you want to make sure that the time and resources you spend on finding a home are spent on options that are comfortably within your price range.
So how many homes can you afford to buy? It’s a complicated question, but one that is absolutely essential in making sure that a home purchase helps rather than hurt your financial situation. When trying to determine how much home is affordable for you, there are two interrelated questions that you need to consider: how much can you afford upfront as a down payment, and how much can you afford to spend once you actually live in it. the House ? We will examine these two questions below.
How much can you afford up front
Before you start looking for homes or potential lenders, spend some time reviewing your own finances to determine what down payment would be feasible for you.
When looking at your financial situation to determine how much you have available for a down payment, make sure your down payment is not from your emergency fund. Your potential down payment shouldn’t just reflect the maximum amount of money you might have access to. You need to be sure that taking a down payment would still leave you with a healthy emergency fund, which is generally considered three to six months of spending. If you don’t have an emergency fund, you should prioritize saving for it before you start saving for a down payment.
You’ve probably been told you have to make a 20% deposit, and there’s a good reason for that: it’s the industry standard, and what Fannie Mae
If 20% is your goal, you can either figure out how much you have available for a down payment and then figure out how much of the house you’d like to buy, or you can figure out how much payment you want to make and set yourself some money. savings. goal to achieve this amount. However, your down payment is only one of the initial costs of buying a home. Remember to budget for closing costs, which will likely be around 2-5% of your loan amount. You can also make improvements, buy furniture, and hire movers before you move in, so make sure there are enough funds available for your home to get you settled.
How much can you afford once you live in the house
Your main expense once you move into your new home will of course be your mortgage, so it’s important to first understand how a mortgage payment will fit into your monthly expenses. There are many calculators online that will take information about your gross income, existing debt, credit score, and projected down payment and automatically estimate how much home you should be able to afford. However, before relying on that calculator answer, start by taking a close look at your own finances. If you don’t have a budget yet, now might be a good time to at least create a base budget for your current expenses against your current income. Find an online budgeting tool or figure out an average monthly credit card bill if you put all your expenses on cards. The goal is to calculate at least the maximum monthly expenses you could make for housing costs.
Lenders will often rely on the Rule 28/36 in calculating what they believe your maximum monthly mortgage payment would be. This guideline suggests that your mortgage or housing costs should not exceed 28% of your gross monthly income, and that your total monthly debt payments should not exceed more than 36% of your monthly pre-tax income. A high debt-to-income ratio (DTI) will make it more difficult to get a mortgage – most lenders prefer borrowers with a DTI of 36% or less, and some lenders may not work with a borrower with a DTI exceeds 43%. Either way, the 28/36 rule is a useful framework for thinking about the size of mortgages that may be available to you.
Understanding the monthly cost of your mortgage is a good place to start, but it’s essential to remember that homeownership will add more to your expenses than the mortgage. If the mortgage alone was consuming all of your available housing budget, you should probably consider putting in more funds and / or buying a smaller house. Maintaining a particular home can be a nasty surprise for new homeowners: a recent study, the average homeowner can expect to pay an average of almost $ 10,000 per year for home maintenance and improvements. Property taxes can also be a significant cost, especially for people living in high tax areas.
If you’re a first-time home buyer or someone moving out of a rental, it’s also important to remember that you might be responsible for more bills as a landlord than you were as a tenant. . HOA charges, garbage removal, pest control, and even basic utilities like heat or water can all be included in your rent payment, but you will become responsible for these costs individually as a landlord. When thinking about your monthly housing costs, make sure you factor in these potential additional expenses and make sure you have room in your budget for your mortgage and all other housing costs.
While it can take time and effort, understanding your financial limits for a down payment and current housing expenses will help you make smarter choices when you start looking for the home that’s right for you.
Disclosure: This article is for informational purposes only and does not constitute a recommendation of any particular strategy. Opinions are those of Adam Strauss as of the date of publication and are subject to change and Pekin Hardy Strauss Wealth Management Disclaimer. Follow me on LinkedIn. Discover my company website or follow us on Twitter.