How Much House Can I Afford?

When you begin looking for a home, you will be met with dozens of opinions. Everyone has a different idea of where, when, and how you should purchase a house. 

There are just as many opinions on how much money you should spend. While it’s important to listen to homeowners’ advice for you, your situation is likely different than theirs. Take your time and do your own research before you start house shopping.

Prepare

First things first: you need to understand your current budget. Put aside homeownership costs for a moment. How much do you pay in rent, utilities, car payments, insurance, student loans, and other debts? How much do you pay on coffee or going out to dinner with friends? Your spending habits are hard to change, so remember to include your “unnecessary” spending in your budget, too. You can always adjust this later, but it’s important to keep these numbers in mind.

The expenses of owning a home don’t end with the monthly mortgage payment. There are extras like Homeowner’s Association fees, mortgage and homeowner insurance, and property taxes. Are you upgrading from a one bedroom apartment to a three bedroom home? Your utilities are going to be more expensive. There is also maintenance that must be done on your home like yard work (mulching, gardening, fertilizing, weed killing), replacing air filters, re-sealing any exposed exterior wood, repainting the exterior of your home, spraying the inside and outside of your home against bugs like ants and mosquitos, and even replacing roof tiles after a major storm.

Then, there are the 1-time costs. This includes the down payment of your home which is usually around 3-3.5% for homebuyers but can be up to 20% on conventional loans. If you are looking to buy a home in a rural area, you could even put zero down on a home! The more you can put down, the better you’ll be in the long run. It will reduce your monthly payment drastically – so save up! Next is closing costs which can be anywhere between 4-6% of the sale price. This cost can be negotiated during the loan process and rolled into your mortgage or made the seller’s responsibility instead.

Calculate

Meet Bobby. Bobby is a recent college graduate. He’s 21, makes $15 an hour, and is currently living with his parents while searching for a home. He has his eye set on an $80,000 home across town. He has been preapproved through Ruoff Home Mortgage and has learned that he is a great candidate for an FHA loan with a 3.5% down payment requirement. The current market interest rate is 3.8%. Bobby has some math to do.

Total Monthly Take-Home Income X 30% = Monthly Mortgage Payment

$2,000 X 30% = $600

Bobby can afford to pay around $600 a month on his mortgage payment. He knows that this will include his property tax, mortgage and home insurance, and the HOA fees.

Determining the percentage of income you’d like to set aside for your mortgage payment is a personal decision. Dave Ramsey, a financial expert, recommends 25% of your monthly income. The real estate industry suggests 36%. This is ultimately your choice, but it is a good idea to stick somewhere in between these two numbers.

3.5% down payment + 6% closing costs = Lump Sum Payment on Home at Closing

$2,800 + $4,800 = $7,600

Bobby will be responsible for up to $7,600 in fees at closing.

Remember, your down payment could range from 0% - 20% depending on the type of loan you decide on with your mortgage loan professional. It’s important to know all of your options in order to make the best decision for your unique situation and lifestyle. Additionally, depending on the current market status, it is very common for homesellers to take on the closing costs themselves. This could save you thousands.

Watch and Wait

The housing market is in constant flux. In order to make the best choice for yourself, you need to pay attention to this market so that you know when the best time to buy comes along. It is in your best interest to watch and wait for a buyer’s market. A buyer’s market is when conditions are ideal for buyers rather than sellers. There are a lot of homes for sale, but not as many buyers. During a buyer’s market, you are more likely to pay a lower price for a home. Sellers will typically pay closing fees, too.

When the market changes, so do interest rates. Watch for when these rates dip – that’s usually the best time to get a mortgage! These market changes are never static, so you need to be ready to take the leap as soon as they happen. You never know when the market will take another turn.  

While you wait, save up some money! You have to raise money for a down payment and closing costs. You may need to make adjustments to your lifestyle. Instead of buying Starbucks in the morning, pop that $6 into a specific savings account. This is also a great time to build yourself an emergency fund for when homeownership surprises occur.

Buying a home is a big decision. Speak with homeowners you already know – family or friends. Speak with mortgage professionals like mortgage lenders or real estate agents. You will get plenty of great advice. Keep in mind that, at the end of the day, you will be making these decisions for yourself. Do what’s best for you!