There’s a lot to consider when you’re trying to figure out how expensive of a home you can afford. A lot of online articles will talk about percentage rules, debt-to-income ratios, and recommend you use a calculator to estimate how much you’ll get approved for a mortgage. What these sources aren’t taking into account is your own personal budget and spending habits. Just because a bank will approve you for a $300,000 loan, doesn’t mean that’s what you can comfortably afford. No one wants to feel like they’re struggling every month to make mortgage payments and having to cut back on things they used to prioritize and enjoy, AKA “house poor.” That’s why we’ve taken a more holistic look at the total costs of homeownership to help you figure out what’s truly in your budget.
Pre-Approval
The first step to your home-buying process is to get pre-approved. This is when a lender looks at your income, assets, and credit score to determine what loans you could be approved for, how much you could borrow, and the interest rate you qualify for. This is an important first step because it will help you determine your maximum budget, your different options for loan types and down payments, and will make you a more serious contender when you start looking at houses.
Down Payment
As you’re getting pre-approved, your lender will likely go over loan types that have different requirements for a down payment. While 20% down has traditionally been considered the minimum, you could qualify for loans that require much less. However, you will likely have to pay PMI (private mortgage insurance) if your down payment is below 20%, which you’ll need to factor into your monthly costs. Ultimately, you should choose a down payment that works for you and won’t totally empty your bank account. There are a lot of costs that come with homeownership and you should always maintain plenty of savings for emergencies as well.
Consider your budget
The loan amount you qualify for combined with your down payment will determine the very top end of your budget. That isn’t to say that you should go out and buy a house for that exact number. Regardless of what you read online about recommended percentages to spend on housing and “what you can afford” based on your income level, ultimately every single person spends their money a little differently. If you don’t already keep a budget, consider tracking your expenses for a few months to help you decide what you can afford. Even if you’re on a time crunch, simply comparing your current housing costs to what you’re expecting to pay in your new home can be really enlightening. For example, if you currently pay $1,000 in rent but are estimating your new monthly housing costs to be closer to $1,500, where is that extra $500 coming from? Do you have plenty of extra monthly income to redirect to housing expenses or are you planning on cutting your spending elsewhere?
There are also maintenance and upkeep costs to consider. If there’s a sudden costly repair needed or you lose your job, do you have the emergency savings to cover those expenses? While mortgage calculators and pre-approval can help you determine the maximum end of what you can afford, you need to ask yourself these important questions to see what is reasonable for you and your personal spending habits.
Additional Costs
There are still a few additional costs to consider, some of which are one-time and some monthly. There are closing costs and moving expenses. It’s likely you’ll put at least a little bit of money into your new home once you’ve moved in, whether that’s just paint, furniture to fit your new space, or larger renovating costs. You’ll also want to consider how things like utilities, property taxes, and insurance will affect your expenses.
It may seem overwhelming at first to evaluate all these potential costs, but having a full understanding of how much you can afford will help you out in the long run and make owning a home as easy and stress-free as possible. Our experienced agents are happy to help answer any additional questions you may have about buying a home!
