How Much Home Can You Really Afford?
Many home purchases focus on mortgages, but there are tons of hidden costs that you may not want to consider when you first start shopping. Add them in and you might have to narrow your search to more inexpensive deals.
So, Stygian the Blue wants to know how much home you can really afford?
How do you know how much home you can afford? My wife and I are looking to buy a house in the next year or two, but we are concerned about hidden costs. It is very easy to calculate the mortgage payment; in three minutes in Excel you will get this information. But what about the actual property tax? Or the fact that heating / cooling a home is probably more expensive than an apartment? How much does it cost to set aside for urgent renovations that you don’t have to worry about when you are just renting an apartment? What about closing costs, which now appear to be in the five digits?
Basically, we think we can afford a house that is worth a certain amount, but we are afraid of being “poor home”. HELP!
Mat Ishbia, president and CEO of Wholesale Mortgage, says a quick count of the “back of the envelope” is three times your and your spouse’s combined income. So, if each of you makes $ 60,000, your home should be no more than $ 360,000.
But he says the best way is to consult with an expert who will tell you all the costs and help you compare options.
You can do it yourself. Calculate the cost of your mortgage first. You can use this mortgage calculator , which includes things like homeowner insurance and property taxes (click on “More”).
If you are saving less than 20 percent, you will also want to add the cost of private mortgage insurance. It depends on where you live and the home you buy, but you can get a rough estimate by calling one or two insurance companies.
Also be aware of the restrictions on lenders. Typically, “lenders cannot approve mortgages that account for more than 36 percent of your monthly income,” says Erin Lanz, vice president and general manager of mortgages at Trulia. “Many lenders tend to adhere to even stricter requirements, limiting mortgage payments to 28 percent of the borrower’s monthly income if the borrower’s credit ratings, employment and income are not stable.” This rule is commonly known as the 28/36 rule, but not everyone follows it. However, at 28 percent, the maximum payout for the average American family (with a household income of $ 59,039 ) should not exceed $ 1,377.
However, math is never so easy. “Consider subtracting other important expenses, such as childcare or transportation, from your total monthly income,” Lanz says. “Your lender will also consider student loans, car loans, and credit card debt.” Your total debt to income ratio cannot exceed 36 percent, so you need to get things in order before you start looking.
Ask lenders for pre-approval, which will give you an estimate of how much you can borrow. To do this, you need to obtain bank statements, payment receipts, tax returns and other documents in due course. Then find areas you can afford and areas you like. You can set up alerts on sites like Realtor.com, Zillow, and Trulia when a home is on the market in your area and with your budget.
In the meantime, you’ll also want to budget for one-off payments like closings, legal fees, home inspections, movers, etc. So yes, it’s expensive and you’re likely to run into unexpected expenses no matter what. but with the right planning, it’s manageable.