Figuring out how much house you can afford doesn’t have to be rocket science. Here are some home budgeting tips to help you buy a home you can afford.
Home Price Vs. Income
All you need to do is crunch a few numbers to calculate how much house you can afford. Here are four easy steps to follow to calculate the price you can afford based on your income.
- Add up your total monthly income. If you’re married, be sure to include both salaries.
- Multiply it by 25% to get your maximum mortgage payment. For example, if you earn $5000 per month combined income, your house payment should be no more than $1,250. Keeping monthly payments at no more than 25% of your income leaves plenty of room in your budget to achieve other goals like saving for retirement or putting money aside for your children’s college fund. **
- Use a mortgage calculator to determine your budget. Keep in mind that this is just a ballpark. Don’t forget property taxes, homeowners’ insurance, and HOA fees will add to the mortgage.
- Realize other expenses may come up. Build room in your monthly budget for home upgrades or emergency costs such as:
- Increased Utilities
- New Appliances
- Ongoing Repairs
- Routine Services (pest control, HVAC tune-ups, etc.)
**Mortgage bankers use various calculations, such as debt-to-income ratio (DTI), to determine how much you can afford. DTI limits your total debt payments, including your mortgage, student loans, credit cards, and auto loans, to 43 percent. These figures are often much higher than financial planners recommend.
Aim for 20% Down
The down payment is the amount you can afford to pay out-of-pocket for the home, using cash or liquid assets. The more down payment you have, the less you’ll need to finance. At the very least, you should save up to 10% of the home price. Twenty percent or more down is better to avoid private mortgage insurance (PMI). PMI usually costs 1% of the total loan value and is yet another fee added to your monthly payment.
Budget for Closing Costs
Down Payment isn’t the only cash you need to save up. Don’t forget the closing costs. The average closing costs are four percent of the purchase price. Your lender and real estate agent will tell you how much that will be so you can pay them on the closing day.
Explore Mortgage Options & Get Preapproved
Research mortgage options and get preapproved. It may take a little extra time, but it’s worth it when you begin your home search. Setting boundaries on the front end makes it easier to find a home that you love that’s in your budget.
Work with a Buyer’s Agent
You can do a lot of research on your own, but you need the help of an expert when it comes to finding and securing your perfect home. An experienced real estate agent can help you figure out how much house you can afford and what kind of homes you can expect to find, considering your market and price range.
Home Budgeting Bottom Line
The cost of a home is the single largest expense most people will ever face. Take time to do the math before you sign on the dotted line. After you run the numbers, consider your personal situation, and think about your lifestyle—not just now, but into the next decade or two. A lender may help you buy a home, but the real person who should decide if you can afford it is you.
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