It’s Buying Time. How Much House Can I Afford?
Now is the time to do it: you have been saving tirelessly for years, sacrificing many of your innocent pleasures in order to achieve your dream of home ownership. Congratulations, you are almost there! You probably have a long list of things you would like to see in your future home, from must-have to nice-to-have that you have spent hours discussing with your friends and family. However, now is also the time to ask yourself some hard questions, including the toughest one: “how much house can I afford?” Finding an honest answer to this question can save you a lot of heartaches in the long run and will determine the rest of your home buying process. This short guide will help you figure out what your budget really is.
1. How Much House Can I Afford?
Your monthly payment will determine how much house you can afford. It includes your mortgage, of course, but also other payments you might not have factored into account if you are currently renting such as general maintenance, homeowner’s insurance, any Homeowner Association fees or tax properties. You will also be responsible for any house repairs, which can be very costly, so the best approach to homeownership is to be conservative regarding how much of your monthly budget you should spend on your housing expenses.
A good rule of thumb is to allocate 25% maximum of your monthly take-home to your mortgage. Don’t hesitate to use one of the mortgage calculators widely available online to get an estimate of how much a given house would cost you, depending on how much of a down payment you might be able to put down and on the length of your loan.
Once you have this number in the head, shop around to figure out how much the other expenses mentioned previously might cost you. Which towns have the highest property tax rate? Which neighborhoods might cost you the most in HOAs? Which insurance companies can offer you the best deal? Could you get a discount by combining your auto and home insurance? How much will you be able to save every month in an effort to prevent any bad surprises if a major appliance in your new house was to fail?
Doing your homework on those subjects might be tedious, but it will give you a better idea about how much you of your budget you will need to allocate to your housing expenses while still being able to live comfortably.
2. How Much Cash Should I Save Before Buying a House?
Buying a house is expensive. To put yourself in a competitive position to buy the house of your dreams, you should have a large sum of cash set aside before starting the home buying process.
Your mortgage will be in part determined by how much of a down payment you might be able to put down: the more money you are able to pay upfront, the less you will have to finance and pay interest on. A larger down payment will also help you secure a better interest rate. Although some types of mortgages might not require a large down payment, some lenders will require that you subscribe to private mortgage insurance, also known as PMI, if your down payment is below a certain level (usually below 20% for a conventional mortgage). PMI might require you to pay an additional lump sum of money at the time of the closing, or a monthly payment in addition to your mortgage payment, or both. In any case, spending some time-saving money for a larger down payment will be worth it in the long run.
In addition to your down payment, you will also need to pay the closing costs on your house which include any fee associated to buying a house, like an appraisal, a home inspection, any notary fees for title search and so on. According to realtor.com, closing costs are usually equivalent to 2% to 7% of the price of the house and the buyer is customarily responsible for the majority of them. If competition for home buying is not too fierce in your market, you might be able to ask the seller for cash back in concessions at closing, but you should have this sum on hand if things do not work out in your favor.
3. How Much House Can I Qualify For?
Once you have determined how much of a monthly payment you can afford and how much money you need to save in order to buy a house, it is time to meet up with a lender who will approve you for a mortgage.
It is a good idea to obtain a pre-approval letter from your lender before starting to look at houses since it will show your realtor and the home seller that you are serious and ready to move quickly for the right house in a market where time can be of the essence. The lending agent will verify all the information you gave him or her regarding your assets, income and down payment before engaging your lending institution to loan you a certain sum of money. This amount is usually higher than what you can afford comfortably, so keep in mind the numbers that you came with yourself particularly those regarding your desired monthly payment.
There are several mortgage options available depending on your credit score, how much of a down payment you are willing to put down and the location and condition of the house you are interested in buying. Save yourself a headache by choosing a fixed-rate mortgage in case interest rates rise during the life of the loan. If you can afford it, a loan with a shorter lifetime (15 instead of 30 years for example) can also save you thousands of dollars in interests.
Now that you have a clear idea about how many houses you can afford, it is time to go house hunting. Choose your real estate agent wisely as they can help you save money and always crush numbers before falling in love with the wrong hone for you. Good luck!