How to Figure Out What House You Can Afford
house you can afford
Buying a home is an exciting adventure. Whether you want a cottage on the outskirts of town or something in the downtown area doesn’t matter, the best part is it will be all yours.
Before you commit to a mortgage payment, you must separate your emotion from wisdom.
Part of the wisdom you must use is making sure that you can afford the home you choose.
You don’t want to commit to a larger home than your budget can afford, even if the bank gives you approval.
Many people forget that buying a home is about more than making that monthly payment.
There are taxes, insurance, maintenance, and unforeseen events like economic downturns.
Your monthly mortgage payment should be relative to your income. A real estate agent has a wealth of knowledge and can help you find a place that fits your family and budget.
Understanding the 28 Percent Rule
The most common rule for deciding if you can afford a home is the 28 percent one, though many are out there. You should buy a property that won’t take anything more than 28 percent of your gross monthly income.
For example, if you earned $50,000 a year, it would be no more than $1,166 a month.
Now keep in mind that that cost must cover everything, including maintenance, taxes, insurance, and HOA fees.
The lender will use a debt-to-income ratio to see if you can afford this space, and this is called the front-end ratio.
How the 36 Percent Rule Differs?
Another debt-to-income ratio is called the back end. This ratio is different because it looks at your housing costs in addition to other monthly obligations.
If you have an automobile payment, credit card debts, or child support, it will be figured into this equation.
When you apply the 36 percent rule to your $50,000 a year salary, your monthly payments should not exceed $1,500 a month.
Now, some lenders are a bit more lenient and will let you go up to as much as 42 percent, but you should be wary of getting in over your head and stretching your finances to the breaking point.
Additional Considerations
There will always be maintenance needs in a home, even if it’s newer. The unavoidable part of homeownership will cost you about one percent of the home’s value each year.
If you paid $200,000 for the house, you should expect to put away about $2,000 each year to cover those costs, which are $167 a month.
There’s nothing better than having a place to call home, but you need to make sure that you make a wise investment.
You don’t want to get into space and a couple of years down the line realize that it wasn’t a house you can afford.
Make an informed decision based on the numbers, and only you truly know what you can afford.
Category: Housing
