Buying a home is one of the most significant purchases of your life. Apart from giving you a roof over your head, it also provides you with a foundation to grow your family and fulfill your dreams.
But before you become a homeowner and complete this milestone, you have plenty of decisions to make. Besides choosing your home’s location and aesthetic, this also refers to getting your funds in order.
This is where you may find yourself asking, ‘How much home can I afford?’ The question may seem rudimentary at first, but it’s critical in nature. In fact, it is crucial to the point where it can influence the whole direction of your purchase process.
To help you find an answer quickly and painlessly, here’s a lowdown on what you can afford in terms of your home or mortgage payments.
Treat Home Prices as a Point of Reference
If you have already found the home of your dreams, the first thing you need to look for is its asking price. While this can be lowered with an offer, you should keep the initial cost as a threshold for your calculations.
On the other hand, if you have only zeroed down your preference to a city, suburb, or neighborhood, you should look at the average listing price. This gives you an idea of the total costs of getting your ideal home.
But if you are open to options, you can start with a clean slate of calculations with an essential price point in mind.
How Much A Home Can I Afford? The Answer Depends Upon a Few Factors
Your affordability and accessibility to a home depend upon a few aspects. This typically includes the following factors.
Your Monthly Income
Since most homeowners and lenders go by the 30-year fixed mortgage, this calculation refers to your household’s income for the long haul. As a rule of thumb, your mortgage payments should remain under 28 percent of your monthly income.
Your Existing Debts
Apart from your regular income, the initial assessment also includes your existing debts, such as student loan payments, car loan payments, and credit card payments. Including your mortgage, these debts should not surpass 36 percent of your monthly income.
Your Down Payment
The analysis also factors in how much you have saved for the down payment. The total down payment you make for your home is subtracted from your overall mortgage and subsequent monthly payments. It also lowers your interest rates. Typically, this refers to 20 percent of your home price, but it can vary on a case to case basis.
Your Monthly Payments
When you put these factors together and calculate them against the current mortgage rates, such as those for the 30-year fixed mortgage, you get a figure of how much you may need to pay for your home’s monthly payment. If you have a home price in place, this gives you a pretty good answer to the question, ‘How much home can I afford for my budget?’
You Also Need to Look at Other Factors
This calculation method, including the 28 percent/36 percent rule, gives you a pretty good idea of how much home payments you can afford. But the final assessment heavily depends on other factors.
For instance, if your credit score is not that impressive, it can affect your borrowing profile and decrease the loan amount you can get against your application. A bad credit score can also increase your interest rates as compared to the average loan application. Similar factors can change the whole outlook of your monthly payments and affordability.
Keeping this in mind, you should move forward with your home loan application with a basic idea of the amount you can afford. While your monthly payments or closing costs may fluctuate through the application process, the overall assessment helps you make informed decisions during your home buying journey.