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. With so many possibilities at your fingertips, it’s easy to get caught up in the excitement before asking yourself the most important question of all: How much house can I afford?
It doesn’t 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 never be a blessing.
Step 1: Start with a Solid Foundation
Before trying to find out how much house you can afford, determine if you’re financially ready to buy a home by asking yourself these questions:
- Am I debt-free with three to six months of expenses in an emergency fund?
- Can I make at least a 10 percent (preferably 20 percent) down payment?
- Do I have enough cash to cover closing costs and moving expenses?
- Is the house payment 25 percent or less of my monthly take-home pay?
- Can I afford to take out a 15-year fixed-rate mortgage?
- Can I afford ongoing maintenance and utilities for this home?
If you answered no to any of the above questions, now may not be the right time to buy a home. Just married? Wait at least a year before buying a home, even if your finances are in order. Don’t add the stress of a home purchase to a brand-new marriage, and never buy real estate with your significant other unless you’re actually married!
Step 2: Get the Right Real Estate Agent
Your search for homes may start online, but it shouldn’t end there. You can do a lot of research on your own, but you need the help of an expert when it comes to finding and securing your perfect home.
A buyer’s agent can help you navigate through the home-buying process. In some cases, they may even be able to help you find a house before it hits the market, giving you a competitive edge. When it comes to making an offer, your agent will negotiate on your behalf so that you don’t pay a penny more than necessary.
Step 3: Maximize Your Down Payment
The more cash you put down, the less money you’ll need to finance. That means lower mortgage payments each month and a faster timeline to pay off your home loan!
A down payment of 20 percent will keep you from having to pay private mortgage insurance (PMI). PMI protects the mortgage company in the event you don’t make your payments, and they have to foreclose on you. It usually costs about 1 percent of the total loan value, and that cost is added to your monthly payment.
Step 4: Get Pre-approved for a Mortgage
Getting pre-approved takes a little more work, because a lender will need to verify your financial information and submit your loan for preliminary underwriting. Although it takes some extra time to get preapproved, it pays off when you begin your home search since a preapproval letter shows that you’re a serious buyer.
Remember, bad financing can turn your biggest asset into a liability. We recommend always getting a 15-year, fixed-rate conventional loan with monthly payments that are no more than 25 percent of your take home pay.
Step 5: Calculate the Costs
You can figure out how to buy a home that won’t bust your budget by crunching a few numbers. Once you know how much you can realistically spend on a new home, make sure you and your spouse are on the same page about your budget and what you can actually pay.
Add up all income you bring home each month, then multiply your monthly take-home pay by 25 percent to get your maximum mortgage payment. If you bring home $5,000 a month, that means your house payment should be no more than $1,250 a month, including taxes and insurance. Also, remember to factor in home ownership costs and moving expenses.
The Final Step
Talk with a professional real estate agent about your financial goals for help in finding a home that fits your budget. A good agent with the heart of a teacher will understand how important it is to help you find a home you can afford — and that means one that won’t bust your budget!