How Much House Can I Afford?
You’re ready to buy a house, but you have a bigger decision to make than choosing the house itself. You have to answer the question ‘How much house can I afford?’ This number may be different than you anticipate, and it may even differ from what the bank tells you. It should be a number YOU are comfortable with – a number that sits well in your budget and allows you to sleep at night.
So how much house can you afford? Here’s how to tell.
Know your Debt-to-Income Ratio
If there’s one number you should know when determining how much house you can afford, it’s your debt-to-income ratio. This is the relationship of your gross monthly income to your monthly expenses.
Ideally, you should use the 28/36 rule – your mortgage (principal, interest, real estate taxes, homeowner’s insurance, and HOA costs) shouldn’t exceed 28 percent of your income. Also, your total monthly obligations (car payment, student loan payments, minimum credit card payments, etc.) shouldn’t exceed 36 percent of your income.
Think about Other Expenses
When considering how much house you can afford bear in mind: owning a home is different than renting. Not only do you have your name on the title, but you are also responsible for EVERYTHING. Home maintenance itself costs an average of 1 percent of the home’s value annually. Then there are the unexpected repairs and potential renovations or upgrades.
If you make yourself ‘house poor’ by maxing out how much you finance, you may not be able to afford regular maintenance and repairs, let alone desired cosmetic changes or upgrades.
How Much will you Put Down?
Your down payment plays an important role when asking yourself ‘How much house can I afford?’ The more money you invest in the home, the more you can afford – here’s why.
When you put money down, you lower the amount you must finance, which lowers your monthly obligation. You can use your down payment to help you afford a more expensive home or to cut down on your monthly expenses by securing a smaller mortgage. Choose what makes you the most comfortable.
Put the Payment in your Budget
When you shop around for a mortgage, get realistic quotes from lenders. Look at the total monthly payment including the principal, interest, real estate taxes, homeowner’s insurance, and HOA dues. Plug it into your budget and see how it feels.
When considering how much house you can afford, take the exact mortgage payment out of your account each month and see where it leaves you. Are you comfortably living or do you have to sacrifice a lot? Are you able to move expenses around and/or adjust your lifestyle or is the mortgage payment too high for you?
How much house can I afford?
Take your time when answering the question ‘How much house can I afford?’ Shopping for a home is exciting, but letting your emotions take over may leave you with financial options you don’t like. Look realistically at the costs and see how it fits into your budget now and looking forward as a mortgage can last you as long as 30 years. Buying a home can be daunting - why not give Chris a call and get the benefit of his 20 plus years of mortgage lending in Arizona!