Home affordability: Know how much house you can really afford to buy
Buying a home is likely the largest purchase you’ll ever make. It’s important to determine how much of a house you can afford when you’re starting the process.
To calculate how much home you can afford, there are a few factors you should look at:
• Interest rate — This is determined by your credit score. If you have a good credit score, you will have a lower interest rate. Bad credit? You’ll have a higher interest rate.
• Property taxes — The amount of property taxes you pay depends on where you buy a home.
• Private Mortgage Insurance (PMI) — If you are not putting 20% down, you may be required to pay mortgage insurance, which would be added to your monthly insurance premium.
• Closing costs — These are the costs associated with closing on your new home, which can include such things as mortgage application fees and inspection fees.
• Housing ratio — This is the percentage of your monthly gross income that goes towards housing payment. A rule of thumb is that your housing ratio should not exceed 28%.
• Debt-to-income ratio — This is the percentage of your monthly gross income that goes toward paying monthly debts including housing. A rule of thumb is that this should not exceed 36%.
• Homeowners Association fees — If you’re moving into a neighborhood with a Homeowners Association (HOA), you’ll need to factor in the HOA fees into how much you can afford. Some are less than $100 per year, other times they are several hundred dollars a month.
• Utilities — Be sure to include utilities such as heat, electricity, water, sewage, trash removal, and cable services into your monthly budget.
While these calculations are important to consider, how much home you can afford is more than a matter of what you’re preapproved for. It’s important to account for lifestyle expenses, future expenses and life changes that may add unexpected budget items in the future.
Some questions you should ask yourself would be: How old is your car? Will you be replacing it soon? Are you planning for a family? How old is the house you’re purchasing? Will there be a lot of repairs? Are you planning on furnishing your new home? Will you be replacing any appliances?
DAN: What can you afford? By afford that doesn’t mean what the bank pre-approves you for but what you can afford is what you can afford for your lifestyle.
RYAN: So think through not only what your current income is, what your future income may be, but also tempered with what your future expenses are going to be. How old is your car? Are you potentially going to replace that? If you’re getting a 30 year mortgage you will end up replacing your car. Kids in the future, childcare expenses. And then roll all that up and see how comfortable you’re going to be with that mortgage payment.
RHONDA: You have to have money to pay the mortgage, but you need money saved up for things that are going to go wrong with the house. Because trust me, they’re going to go wrong. It’s never going to be convenient when they go wrong.
BRENDA: There was an issue with plumbing. The sink got clogged and I had to get a plumber and that was another $300 there that was unexpected in the first week. Just little things like that that you want to plan for.