Can I Really Afford This? Determining How Much House You Can Afford.
Thinking about buying a new home? Whether you’re a first-timer or a seasoned pro, determining what you can afford is the first step. The last thing you want is to end up with a mortgage you can’t afford and nagging worries that you won’t be able to stay afloat.
Thankfully figuring out what that price range is doesn’t require a ton of legwork. In fact, if you follow the steps below, you should be able to quickly determine what you can realistically afford.
Ready to get started? Let’s jump right in, shall we?
First, figure out how much money you have to work with.
To calculate this number, you’ll need three things:
Monthly Income
How much money do you (and your co-borrower if you have one) take home? If you are a salaried employee, this should be pretty easy to figure out. If you earn a flexible income, such as with commissions or tips, it’ll probably be a little trickier and you may need to calculate an average amount.
A SnapFi Tip: In addition to crunching the hard numbers, ask yourself the following questions:
- Do you feel as though you have job security?
- If you have fluctuating income, are you confident that it will be stable enough?
- Do you expect your income (or that of your co-borrower) to change at all in the near future?
- Are you planning any major life changes, such as starting a family? If so, can you comfortably afford the added expenses that change will bring?
Monthly Expenses
You may be living comfortably right now, but it’s important to remember that as a home owner, you’ll need to also account for things like maintenance and repairs. Make a list of how much you’re spending on current housing, credit cards, student loans, car payments, utilities, food and entertainment, etc. Be honest with this step, otherwise you could end up in over your head.
A SnapFi Tip: A good rule of thumb is that you shouldn’t be putting more than 36% of your income toward debt. If you are, it might be a better idea to focus on paying down some of that existing debt before you start house hunting.
Savings
How much money have you socked away for a down payment? If it’s not 20%, don’t sweat it. There are plenty of loan programs that offer flexibility with the percentage you’re required to put down, but you’ll likely need at least 3%. You’ll also need enough to cover closing costs.
A SnapFi Tip: You don’t want to completely deplete your savings because there are many unexpected expenses that can arise with homeownership. Having enough money in savings to cover emergencies is strongly advised.
Next, figure out what type of rate you’ll likely qualify for.
The interest rate on a mortgage can dramatically impact the actual payment amount, so determining what rate you’re likely to qualify for can help you better pinpoint how much you’ll be paying for your home each month.
To start, check your credit score. The exact FICO score number that’s needed will vary, depending on the type of loan that you’d like to qualify for, but this should at least give you a starting point. Once you have an idea of your score, contact a trusted mortgage advisor and they can help you determine what interest rate you may qualify for.
Pro Tip: If your credit score is low (below 680), the number of loan options you’ll qualify for will be limited. You may instead want to focus on improving your score before taking the next step.
Lastly, determine what your additional expenses will be.
Remember that in addition to your monthly mortgage, owning a home also includes the added expenses of property taxes and homeowner’s insurance.
The property tax amount will vary city to city, but Googling the local property tax rate in the city you’re interested in buying in should at least give you a ballpark figure to work with.
Be sure to take the time to actually calculate the approximate dollar amount based on the median home values in the area you’re looking to buy. This will provide you with a realistic picture of what you’ll be paying so you can avoid any unpleasant surprises down the road.
For homeowners insurance, the average annual cost comes in around $800, so keep that in mind as well.
Now it’s time to crunch the numbers.
With all the information you’ve gathered in the above steps, it’s time to start crunching those numbers. You should be able to get an idea of how much your mortgage will be, based on your estimated interest rate. Then, take your income, minus expenses (including additional homeownership expenses), and figure out what you can comfortably afford.
Still feeling confused or overwhelmed? No worries. That’s what we’re here for. Give us a shout and we’ll be happy to do all the legwork for you.