How Much New House Can You Afford?
You’ve found your dream home. Congratulations! Now the question is, can you really afford it? Overextending yourself is only going to lead to stressful days and sleepless nights. Nothing dreamy about that.
First things first: The budget
If you’ve been keeping a monthly budget, you’re already several steps ahead. If you haven’t, there’s no time like getting ready to buy a house to do it.
1. Figure out your monthly take-home pay.
2. Make a list of recurring monthly expenses. It’s helpful to separate them out into categories: Necessary (like utilities), Necessary but flexible (like groceries), and optional (like entertainment).
3. List of expenses you’ll add as a homeowner. More than likely, you’ll be paying things like water, trash, and home upkeep. Depending on the type of home you buy, you may also have a monthly HOA fee to consider.
4. Figure out what expenses might go away. This would include Renter’s Insurance, or any other expenses you might want to cut back on, like those 500 cable channels you never watch.
5. Now you know how much you have left over to spend on housing. It’s a good idea to include funds for savings and emergencies.
In preparing for buy a home, the other key piece is to . A higher credit score may lower your interest rate, and lower your monty payment, saving you lots of money down the road. Fortunately, there are a number of fast and easy ways to check your credit score online. A number below 580 is considered very poor. A number above 720 is excellent. Knowing your score ahead of time means that you won’t be in for any surprises when you meet with your mortgage broker.
Speaking of mortgages…
Getting prequalified is a fairly easy process. You’ll just need to provide income, employment history, bank accounts, and of course your credit score will be checked. If approved, you’ll get an estimate of how much you can borrow. Remember, this is an estimate. not a loan. And it doesn’t mean that you have to spend your entire budget.
A conditional mortgage approval can speed up the buying process because you go through most of the loan application process before you find a home. This can be very helpful in tight markets when there is intense interest in a property. It shows the seller that you are a serious buyer, and can possibly put your offer ahead of others who may appear to be less prepared than you.
Rules of thumb
A monthly mortgage payment should be no more than 28% of your monthly gross income. For example, if your monthly gross income is $6,000, then you could be able to afford a $1,680 monthly mortgage payment. This is why knowing your monthly budget is key.
As for the down payment, if it is less than 20% on a conventional loan, you’ll have to purchase private mortgage insurance, affectionately known as PMI. PMI will typically cost less than one percent of your outstanding loan balance. That seems small, but over the life of the loan, it can add up to thousands of dollars.
Now, with these home buying basics, you’re ready for happy (and smart) real estate shopping.