If you are wondering how much you can afford to spend on a home, the answer will be entirely dependent on your own circumstances.
You will have to base the decision on your current income and how much debt you have, as well as other factors like how much you can raise for a down payment. If you find you are not in the best financial situation to purchase a home, you should wait until you are ready. There is no point diving head first into a complicated situation if you will be struggling to keep up the payments.
Use the steps below to figure out how much you can afford to spend each month on a home. Most who find themselves in a similar situation often overlook hidden expenses that come with home ownership. Taking the time now to determine exactly what you may be getting yourself into can save you years of stress in the future, or it can solidify your readiness to begin searching for your new home.
Ask more than what it will cost you
Buying what is probably the most expensive thing you will ever own is filled with challenges. Before you even begin to search for a new home to live in, you will first have to determine how much you can afford to spend on a property.
Chances are you will not be purchasing the home outright, so you will need to know how much mortgage you would qualify for. However, it is not just the home itself that comes with a price tag. There are also other real estate costs, such as the fees for transferring a property to your name. Homes also have taxes, insurances and ongoing maintenance costs you will have to find the money for.
It is important to speak to different lenders to see what your mortgage options are. However, you should remember that mortgage brokers and real estate agents will not be objective in their financial advice. It is always best to get independent advice. Personal accountants are excellent resources for such a discussion.
Although speaking to financial experts is advisable, it is crucial you also spend time working out your general expenses and any expenses you have planned. Just because a lender is willing to give you a large mortgage, it does not mean that is the figure you should spend on your home. Only you can determine whether you can afford to pay back the loan on offer.
Avoid These Mistakes
- Taking the largest mortgage offered to you
- Visiting only one loan officer or lending institution
- Not knowing your debt to income situation
- Knowing what the current interest rate is for the housing market
Work Out Your Budget Beforehand
One of your first steps is to sit down with paper and pencil and make a list of your income and all of your debt. Look at your current expenses as well as any known future expenses you may have. Also factor in additional costs you may be presented with once you have bought a property, such as repairs and appliances.
When working out how much you can afford to buy a home for, the easiest way to estimate the cost is to multiply your annual salary by three if you are on a low income and by four if you are on a higher income. For example, an annual salary of $80,000 will usually allow you to purchase a home priced from $240,000 to $320,000.
The other way to do this is to figure out what you could afford to pay each month for a home. Do this by taking your monthly income after taxes and subtracting all of your current debt. Then multiply it by 25 percent to give you the figure. For someone on $80,000 a year, this will make the monthly payments approximately $1,200. Overall, a good rule of thumb is to make sure your monthly payment is not more than 28 percent of your monthly salary. This allows you to factor in other costs for your home, like taxes and maintenance.
Make sure you have carefully considered all of your costs before buying a home. It is always best to err on the side of caution and plan for unexpected expenses when working out your budget. The more honest you are with yourself about your spending and the more time you take to prepare your financial status, the better position you will be in. Here are some steps you should take before deciding how much you can spend:
- Assess your monthly and annual spending
- Check your credit score
- Budget for future and unexpected expenses
- Get financial advice from trusted professionals
Down Payments and Closing Costs
Do not overlook any additional costs associated with buying a new home. First, in almost all instances you will have to produce a large down payment. A down payment is the money that is given to the seller of your home up front. The rest of the seller’s money is paid by the mortgage company. Mortgage lenders must have at least three percent of the home’s cost as a down payment, although depending on factors like your credit history and the type of property you are buying, lenders may require a down payment of up to 20 percent, and sometimes more. It is actually advisable to have a down payment of about 20 percent already saved up. The advantage of this is that it does lower the amount of the loan you will be paying on. A down payment of less than 10 percent is not a good idea. For one thing, a down payment of less than 10 percent means you will need to pay for private mortgage insurance. Money for a down payment can come from:
- The money raised from selling a property
- Your savings
- A grant
- A gift from your family or employer
On top of the down payment, you will also have to have money to pay for closing costs. Closing a deal will cost at least $5,000 and is often more. Be sure to check with your realtor to know how much this necessary payment will be. There is often room for negotiation on this, as some sellers may agree to split this cost with you, and in some instances, the banks cover the closing costs or figure them into the overall loan. Each will handle it differently so if you are looking for a haggle point, this would be one of them.
By Melanie Henson –