One of the most important questions for a homeowner to answer is how much home they can really afford to buy. The specific dollar amount answer to this is going to vary based on the circumstances of your home purchase, yet there is a basic rule of thumb that can help you know what to spend. If you are getting ready to buy a home, here is what you need to know about budgeting for your home purchase.
Trust in a Mortgage Professional
No two mortgage needs are the same. A trusted mortgage professional will evaluate your specific needs and abilities while presenting options for home financing. With a slew of banks and home financing options available to them, mortgage professionals are proficient at determining how much house you can afford. If you don’t already have a mortgage professional a good place to start is with a Realtor – most Realtors will have a preferred professional with a proven track record of getting loans approved.
Consider Your Overall Paycheck and Debt Amounts
The most important figure to determine is your total amount of debt repayment, including the potential new mortgage. Compare this to the amount of money you take home every month from your jobs and aim to keep the ratio at 30 percent. This means you should spend no more than 30 percent of your total take-home pay to pay your mortgage, student loans, credit cards, car loans and other debts. If you keep your debt payments below this amount, you should have plenty of room in your budget for utilities, groceries, and other daily living costs.
Know that Banks May Lend You More
Sometimes, buyers will assume that they can borrow more than they can afford because of what their bank tells them. When you apply for pre-approval, your lender will likely give you a much higher number than fits within that 30 percent amount. This is because the lender does not look at your day-to-day budget. Rather, the lender looks at your debt-to-income ratio, overall available funds, including your investments, your credit score, and the amount you’re going to put as a down payment. This means that the lender does not consider what you are already paying every month for your other debts.
How to Afford More of a House
If you run the numbers and find that you do not have as much to spend on a home as you wish, you can take a few measures to improve your buying power. The more you can save to put down on the home, the more you can afford to spend. Saving the full 20 percent for your down payment will earn you a lower monthly mortgage payment and may also earn you a lower interest rate, so you can afford a larger home.
If saving the full 20 percent is not possible, which is often the case for first-time buyers or buyers who do not have much equity in the house they are selling, save as much as you can. However, stick within the 30 percent range for your monthly debt payments to income ratio. Why is this so important? A mortgage is a long-term financial commitment, and you do not want to over-burden your future just to buy a slightly larger home. All it takes is a serious medical problem or the loss of a job to significantly change your financial situation, putting your home at risk.
Remember, buying a slightly smaller or more affordable home than you may have your eye on is not a bad thing. At the end of the day, you will have a home that fits your needs and a mortgage that fits your budget. Run the numbers to see what you can afford, then stick to it as you hit the market and start shopping.
If you have considered buying up and rolling your equity into your next home give us a call at (310) 529-5286.
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