Buying your first home is one of the most important and exciting financial milestones of your life. Buying a home can be lots of fun. It’s exciting to see all those years of dreaming come to life in a place you can finally call your own. But before you hit the streets with a Realtor, you need to have a good sense of a realistic budget. Just how much house can you afford? You can determine how much house you can afford by following three simple rules based on different percentages of your monthly income.
The 28/36 Rule for Affordability
The rule in determining how much home you can afford is the 28/36 rule. Lenders use this rule of thumb to assess how much of a mortgage you qualify for. This golden rule says that your mortgage payment (which includes property taxes and homeowner’s insurance) should be no more than 28% of your pre-tax income, and your total debt (including your mortgage and other debts such as car or student loan payments) should be no more than 36% of your pre-tax income.
Income, debts and down payment are big factors when it comes to calculating your affordability. But you need to be aware of certain other factors also. Believe it or not, the interest rate you get could make a big difference in how much home you can afford because a lower interest rate could significantly lower your monthly mortgage payment. Your personal savings goals or spending habits can also make a big impact on your affordability, so remember to consider these when setting your home-shopping budget.
There are certain factors to be considered in homeownership costs. These costs may include:
- Increased utilities
- New appliances
- Ongoing repairs
- Routine services (pest control, HVAC tune-ups, etc.)
Your emergency fund can cover major home disasters. But if you will be saving up for a few home upgrades or you’re a first-time homeowner, build a room in your monthly budget for those expenses so there are no nasty surprises.
A down payment isn’t the only cash you will need to save up to home. There’s also a hefty closing cost to consider. Your Real Estate agent and lender and will let you know exactly how much your closing costs are so you can pay for them on closing day. These costs cover important parts of the home-buying process, such as:
- Appraisal fees
- Homeowner’s insurances
- Home inspections
- Credit reports
One more important thing to consider is a preapproved mortgage. You should get preapproved for a mortgage When you get a mortgage, make sure you know the difference between fancy-sounding terms like getting prequalified and preapproved. A lender can prequalify you to buy a house in just a quick conversation with you about your income, assets and down payment.
Getting preapproved requires a little more work. A lender will need to make sure your financial detail is accurate and submit your loan for something called preliminary underwriting, which is just another step in the approval process that determines how much money they will let you borrow.
Sure, it takes some extra time to get preapproved. But it is certainly worth when you begin your home search! A preapproval letter shows sellers you are a serious buyer and that they can sell their house faster if they choose your offer over competing offers that haven’t been preapproved.
Your mortgage lender might approve you for a bigger mortgage than you can afford. Do not let your lender set your home-buying budget. Ignore the bank’s numbers and stick with your own. Knowing your house budget and sticking to it is the only way to make sure you get the mortgage that you can pay off as soon as possible.
Do a detailed analysis of your finances and mortgage before getting into the buying process. It is easy to get caught up in the excitement before asking yourself the most important question of all: How much house can I afford? Don’t get carried away by what you see. It does not matter if the kitchen is fabulous or the backyard is big. If you can’t pay the mortgage each month or find the cash to fix what’s broken, your home will be a burden—not a blessing!