How to Know What Kind of House You Can Afford
No one wants to think about the possibility of not being able to afford their dream home, but it's essential to be realistic and know what you can afford. This guide will help you determine how much house you can afford based on your income and expenses. To calculate the home you can afford, take a few direct items into account. Consider your monthly household debts (car loans, student loan payments, etc.). So, whether you are an experienced house buyer or are getting ready to buy your first one, read on for helpful tips!
Monthly Mortgage Payments
Understanding your monthly mortgage payments is very important. Even if you can afford a downpayment, do you have consistent money coming in to pay off monthly mortgage payments? If your down payment is smaller than 20%, you're going to have a monthly mortgage insurance payment (PMI or MIP) along with your mortgage. Therefore, to know what kind of house you can afford, be sure to pay close attention to the down payment, homeowners insurance, and property taxes. These numbers will help you understand what kind of monthly mortgage payment is within your means.
A good rule of thumb is to have three months of payments in reserve, including your housing payment. That way, if something unexpected arises (such as job loss or illness), you'll have money set aside to continue paying your expenses.
Your income is critical in determining how much house you can afford. If your household income is $4,000 per month, calculate your maximum monthly payment at about 32% of that number; if you can pay more, great! But it's a good idea to start with a guideline and go from there.
Your income also includes any additional pay, such as overtime. It's also important to remember that credit scores are an essential part of obtaining a home loan, so be sure to look into how your total debts (credit cards, student loans, etc.) will impact your credit score before applying for a mortgage.
Monthly Debt Payments
In addition to your monthly income, it's essential to consider your debt payments when determining how much house you can afford. This includes car loans, student loans, and any other monthly debt payments that you might have.
In general, lenders want to see that your monthly debt payments plus your mortgage are no higher than 45% of your income. If you have a high credit score and a strong history of paying off debts, you may be able to afford slightly more – but it's best not to take the risk by going over this guideline. As always, it's a good idea to consult with a lender and go over all of your options.
It's important to remember that the more money you put down, the less money you will need to borrow, and the more minor your monthly payments will be. On a house with a higher purchase price, putting down 20% could reduce your loan amount by up to 40%. It's always better to use savings to make a downpayment, but if you're looking for some assistance, there are many
programs available that can help.
The down payment amount will directly impact the amount you need to borrow and your monthly payments. Try using a downpayment of at least 20% – it's essential to put as much money down as possible, even if it means saving for a few extra months.
Debt to Income Ratio
Before buying a house, it's a good idea to look at your debt to income ratio. This is the percentage of your monthly income that you spend on debts each month. When figuring out how much house you can afford, keep in mind that lenders will want a total debt to income ratio of no more than 36%. That means if you make $4,000 per month, your total debt payments should not exceed $1,320 per month.
What does that mean? If you have two cars that are up for renewal in the next six months, it's best to wait until after you buy a house to renew them. Otherwise, you might find yourself without the money required to make your monthly mortgage payment.
You can also consider a 28%/36% rule. This rule says that keep your housing payment to 28% of your income when calculating how much you can afford. All other debt payments should be no more than 36% of your income.
Property taxes are required by law and set by local governments. The amount of property tax you pay depends on the value of the home, as well as the tax rate in your area. The typical property tax ranges from 0.5% to 2.0% of a home's value, but it can be as high as 3%. Property taxes are paid in one lump sum or several payments throughout the year, depending on how you choose to pay them.
Your total monthly expenses should not exceed 45% of your income, including your mortgage payment. Suppose you make $4,000 per month and spend $1,320 on your housing payment (including taxes). In that case, the remaining amount should be spent paying off debts and other monthly expenses such as utilities, transportation, and groceries.
In addition to your debt-to-income ratio, you should also consider how much money you have saved up to put towards a down payment and closing costs. To make sure that you've got enough cash on hand when buying a house, many lenders will require borrowers to meet one of two options: show proof that they have an additional three months' worth of payments set aside in case something should happen to their job or show evidence that they have at least 5% of the total purchase price set aside in cash.
Quite often, homebuyers find themselves spending more than they'd anticipated on closing costs. Lenders expect borrowers to pay around 2-3% of their mortgage amount for closing costs. Remember to take this expense into account when figuring out the total amount of your monthly mortgage payment.
Consider your credit score when deciding the house you can afford. If you have a good credit score (think: above 700), you'll likely qualify for lower interest rates and be able to get approved for more houses. If your credit score is not as strong, it might pay off, in the long run, to beef up your credit, check your credit report and try fixing any mistakes that appear on it before applying for a new loan.
If you find your credit score is not high enough to qualify for a house, a few options can help you improve it. First, make sure your credit report is accurate. Errors on your credit report may be preventing you from getting the best possible rates on loan.
Also, keep up-to-date on all of your monthly payments and pay off any outstanding debts as fast as possible to establish a solid history of credit management.
What Other Debts You Have
Besides paying off your monthly bills, you should consider how many outstanding debts you have to know what house you can afford. For instance, if you have a big car loan, getting approved for a mortgage might be more difficult. That's why it's essential to not only look at your debt-to-income ratio but also your total outstanding debts and monthly payments.
It's always better to use savings to make a downpayment, but if you're looking for a quick sale, you'll need to find a home with the highest possible sales price, and that means borrowing as much as possible. In addition, if you're looking to minimize your interest rates by refinancing your home, lenders will expect borrowers to have a 10% downpayment on their new property.
How Much You Can Spend
In addition to your income and the amount of money you have in savings, you should also consider the amount you can spend before buying a house. While it's good to be as ambitious as possible, make sure you can afford a home before you offer a bid on one.
In some markets, buying a home is getting more and more difficult. There are fewer homes available for sale, and the ones that are there, usually have very high asking prices. In addition, property taxes in your area may not be as low as you expected, and initial costs like moving and closing costs can eat into your savings.
If you see homes that are too good to be true, they probably are. Suppose a property is listed at an unrealistically low price compared to the others in the area. In that case, there's a reason for it – either the house has a defect, a fault, or several significant problems. Buying a home without having it inspected first is always a risky move and one that may cost you more down the road.
When you buy a house, you have to remember that there will be an amount of money involved that you won't get back even if you sell your home in the future.
In addition to closing costs, you should also know how much monthly fees you'll have to pay for owning a home. It's easy to get excited about a great house and then not realize that if it has a pool or many extra rooms, the utilities associated with that could add up.
The size, age, and condition of a home can affect its value. For instance, if you buy an older home, you'll probably have to spend more money on repairs than if you purchased a newer one.
Along with interest and fees, there are several other charges you'll have to be aware of when it comes time to buy a home. These charges can add up quickly and turn into a substantial amount that makes the price tag of your new house much more expensive than expected.
These so-called 'closing costs' can include appraisal fees, inspection costs, title insurance, escrow fees. Before placing a bid on a house, know exactly what the closing costs include and how much they will cost. You don't want to spend a lot on groceries and cable bills and then find out you have to pay $500 for a 'recording fee.'
Homeowners insurance is another expense you will need to consider when determining how much you can spend on a home. If the home is older, has wood or plaster walls, or was built before 1978, it will probably be more costly to insure than a newer property.
If you want to minimize your costs when buying a house, consider getting renter's insurance in addition to homeowner's insurance. This will help cover any damages that occur to your items and in the event of a fire or other serious disaster.
If you don't have enough money for a downpayment on your home, consider taking out a loan from a bank or financial institution. These loans typically come with much lower interest rates than if you were to take out an equity line of credit on a credit card or a second mortgage.
They do, however, have their own set of rules and restrictions that you should know before taking out a loan. Many personal loans require borrowers to pass an income verification test to qualify; the lenders will need proof that your potential monthly payment is affordable for you before they give out the money.
While it's true that buying a house is one of the most expensive investments you'll ever make, your home can also be your most valuable asset; one that will pay off in the long run by giving you a place to live and build equity as your family grows and your career takes flight.