How much house can I afford
Purchasing a home is a big stepping stone in your life but what you need to know is that your purchase of a home shouldn’t just be solely influenced on how nice looking the home is or if it has amazing features. What you need to take into consideration is how much you can afford while staying within your budget. In this blog we will guide you on your answer to “how much home can I afford”.
Why is Affordability so important
Asking yourself “how much house can I afford” is a good strategy, by doing this you can save yourself from financial problems in near future, there is chance property values could rise, severe fixing costs, as well as high property tax. By staying within your budget you can avoid high expenses.
The 28/36 rule
A common formula used when determining how much home can you afford is the 28/36 formula. It is formula that mortgage lenders use to determine how much a borrower can afford.
- 28% Rule: You shouldn’t pay more than 28% of your income on home expenses, these expenses are property tax, mortgages, and homeowner insurance.
- 36% Rule: Total debt payments shouldn’t be above 36% of your gross monthly income.
This formula provides a good benchmark especially for first home time buyers. By following this formula buyers both first time and long time can make sure that don’t exceed their budget.
If you wish to learn more about the 28/36 rule head to Investopedia.
Affordability Costs
Income
Your income prior to taxes is a determining factor for affording a home. When visiting a lender they use your gross income to determine what kind of loan you qualify for. What is taken into consideration is salary, freelance income, side income, commissions, and child support if applicable. It is important to see what your income is prior to purchasing a home. It’s also important that you have a consistent and reliable as well as verifiable sources of income, the reason for this is because lenders of all kinds will require proof of income to not only determine what loans you qualify for but also how much you can afford.
Credit Score
Like an income your credit score plays a crucial role, there might be a chance you wont be able to afford a home so you might take a mortgage out to afford it. But there is a catch however, if you have a less than good credit score you might not be able to secure a loan. Here are the credit scores that help determine if you can afford a home.
- 760 and up: Excellent
- 700 – 759: Good
- 650 – 699: Fair
- 600 – 649: Risky
- 599 and below: Bad
If you want to raise your credit score make sure you pay your bills on time, stick to a reasonable budget, and this is common knowledge but should be said anyways “don’t spend more than you make”.
Current Debts
If you any current debts that need to be paid off it can affect you chances of securing a loan to afford a house some of these debts can be:
- Personal Loans
- Student Loans
- Credit Card payments
- Car Payments
- Legal Obligations
Reducing your current debts gives you a much better chance of securing a mortgage loan or even larger loans and be able to afford a home.
To learn more about debt and how to solve it head New York Life.
Down Payment
When you make a down payment on a home the amount often determines how much you can be approved for. 20% is the norm amount for a down payment but there are other places that can ask for much smaller down payments.
- Conventional Loans: 3%-5%
- FHA Loans: Minimum 3%
- VA Loans: 0% Eligible Loans
- USDA Loans: 0% for qualifying loans
While these do seem good putting down a larger down payment can reduce the amount of the mortgage payments.
Loan Term
The length of you loan can also affect the affordability most mortgage terms last from 15 to 30 years.
- 15 year mortgage: Much higher monthly payments but there is low interest
- 30 year mortgage: Much lower monthly payments but there ishigh interest
Consider what your finical goals are before you determine what mortgage term you want.
Other expenses
Unfortunately your monthly mortgage isn’t the only thing that needs to be paid there is also:
- Homeowner Insurance: Protects your and property from any sort of damaged.
- Property Tax: Tax paid by property owners.
Some the expenses may vary based on company who provides insurance and state that you pay property tax in.
To learn more about what other home expenses that come with a home head to Cambridge Credit Counseling.
More Costs
Unfortunately the expenses don’t stop at insurance and property taxes, there will also be expenses you will incur to keep the home looking decent and maintained. Most experts advise that you set aside at least 1% of the home’s income for repairs and maintenance related services.
- Appliance replacements: Some appliances might need replacing like water heaters, sinks, microwaves, etc.
- Utility Bills: Electricity, gas, and water usage can add up and depending on how much you use can cause a lot
- Snow Removal: While this might not apply to you or you plan to remove the snow yourself, you might need to pay somone to remove it for you.
- Pest Control: Homes can be susceptible to some “uninvited guests” and if the situation is that dire you might need to hire someone to “take care of them”.
- Property Damage: While you might have homeowner insurance to cover the damages that can happen to a home, there might be a chance your insurance might not be able to cover everything.
These aren’t included in the mortgage but they are important costs.
HOA fees
If you plan to live in an area that has an HOA there is chance you will be paying fees for things like amenities, shared expenses, and other things, also if you live in a HOA area there is chance you may incur penalties for not keeping your home maintained, it can happen.
To learn about what an HOA is head to Investopedia.
Before buying your future home
If you see yourself buying a home in the near future then it is best to do the followings things before purchasing any home.
- Pay off an current or existing debt: By paying off debt you can reduce any monthly monetary obligations.
- Build up your credit score: Pay off your bills, debt, pretty much any money you owe to anyone or any organization.
- Boost Savings: If you put a larger down payment on the home it will lower your loan amount.
Don't go over your budget
This is common knowledge but it should be regardless DON’T GO OVER BUDGET. You might have been approved for your loan but that doesn’t mean that you should spend it all right away. A good practice you should do is buy below your affordability for some monetary flexibility. By spending less than your budget it can provide some extra money for any unexpected expenses or complications that might arise in the near future like a job change, damages to the home, a rise in living costs.
Conclusion
Based on what has been provided for you in regards to how much house you can afford there is more to it than just affording a mortgage provided by the bank or a lender, it’s about making good decisions with your finances, knowing what your budget is, what expenses you can incur, what credit score is best for loans, and knowing your income provides with the confidence of what kind of home you can afford and have a sound mind when making those decisions.
When you own a home it shouldn’t be a source of stress, instead it should give you sense of stability. To achieve make sure you stay realistic by asking yourself what you can afford, stick to a plan that you already have set, make sure you put financial stability above how a house looks and feels, a home within your budget makes everything more enjoyable for you.
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