How Much Home Can You Afford?
Knowing what you can realistically afford is an important first step to buying a home. One of the mistakes people commonly make when home searching is being overly ambitious and taking on a loan that is too big. Taking on a mortgage that is more than you can afford means you won’t have the money to do extra things you want to continue doing, like vacations or eating out. The good news is that this mistake is simple to avoid if you follow the below steps.
Know your numbers
Knowing your numbers is key to ending up with a home that you not only love, but that also fits your budget. Add up what money comes into your household every month and subtract from it what goes out.
What’s coming in (household income)
Include all money that your household brings in on a regular monthly basis. This includes paychecks, retirement accounts, welfare payments, and investment returns.
What’s going out (monthly bills)
Include all bills you pay every month. This includes utilities, groceries, credit card debt, etc. Don’t include your rent payment since you won’t have that expense once you buy a home.
What you’re keeping (savings)
This is the amount you put into savings each month. Chances are, your down payment and closing costs will come from here.
What you might need or want (extra expenses)
Include all the extras that you want to be able to continue to pay for. This should include both planned (video streaming, eating out, gym membership) and unplanned items (home or car repairs, gifts, unexpected travel).
What you can pay (your monthly mortgage payment)
Take your household income and subtract your monthly bills and estimated monthly expenses. The number that is left will give you an idea of what you can afford to pay towards a monthly house payment. Then use this handy calculator to figure out how much home that translates to.
How much down payment can you afford?
How much down payment you can afford depends on how much you have in your savings, and how much you need to leave in your savings.
A good rule of thumb is to make sure you have at least 3 months of living expenses saved up. That way if you were to face an unexpected loss of income, you would still be able to pay all your bills for at least 3 months.
If you don’t have enough money saved for a down payment, don’t give up hope. There are loan programs that require little to no down payments. You also may be eligible for down payment assistance programs. Talk with your loan officer about what is available to you. Land Home even has down payment assistance programs available in the form of a grant.
Follow the 28/36% rule
If you’ve been researching home purchasing, you have probably come across the concept of the 28/36 rule. This is a commonly used starting point for determining how much home you can afford.
The rule states that you should spend no more than 28% of your gross monthly income on home-related costs and no more than 36% on total debts.
Example – if you earn $5,500 a month and have $500 in existing debt payments, your monthly mortgage payment for your house shouldn’t exceed $1,480.
Better to be safe than sorry
When looking for that perfect home, it can be easy to get caught up in the thrill of the hunt and before you know it, you are bidding on a home that you can’t realistically afford.
Knowing your numbers before you start seriously home searching is one of the ways you can be a smart home buyer and prevent yourself from overextending your budget.
Use this calculator to get a good estimate of what your monthly payment would be.
If you are ready to start the home buying process, go here to find a Land Home loan officer nearest to you or just call us at 800.672.9470 and one of our friendly staff members will be happy to get you started.
This article is for educational purposes only and not to be construed to be legal advice.
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