When searching for a house, getting carried away with the price is easy. The “what if we could afford…” starts to become, “How do we afford.” It’s important not to overstretch your budget for your home. This will cause a ton of financial stress and burden down the road.
It’s time to get realistic about your standard of living and what is in your financial means. There are many factors in play, like location, income, and credit score. It’s important to make a well-informed decision. So use this guide to start planning what properties are in your budget.
The Foundation: Your Location
The first step in determining the house you can afford revolves around your preferred zip code. Different locations have varying price tags for homes. This is mainly due to factors like demand, amenities, and proximity to downtown. Researching the average home prices in your desired area will provide a realistic starting point.
You can take this further by deciding if you want to buy a move-in ready home or a fixer-upper. Fixer-uppers can have a much cheaper closing cost but will require more renovations. However, the renovations are according to your wants and needs. This will give you and your family a stronger sense of ‘home’ if you construct it according to your preferences.
Assessing Your Current Income
Your current income serves as the bedrock of your home-buying budget. Lenders typically use a rule of thumb that your monthly mortgage payment shouldn’t exceed 28% of your gross monthly income. This ensures that your mortgage remains manageable and leaves room for other essential expenses. You always want to pad big debt payments like your mortgage. Don’t overstrain your budget with your new house.
The Power of Your Credit Score
Credit scores are an important metric for lenders when approving you for a loan. You can reference this article that goes over how to prepare for a loan. Your credit score will help determine the loan you get and the interest rate you’ll pay. A higher score means a more favorable rate. It also means you’ll be able to afford a more expensive home. Start improving your credit score immediately if you’re looking to buy an expensive home with a good interest rate.
Dual Income Families: Doubling Your Buying Power
For families with dual incomes, the purchasing power increases significantly. Lenders consider both partners’ incomes, allowing for a higher loan amount. This increased budget can provide access to larger homes or more desirable neighborhoods. Take into account seasonal jobs and the demand for your jobs in the new city.
Examples of Earned Income to Home Prices
We’ll go over an example. It will show income in relation to the house you can afford. Consider a couple with a combined gross income of $100,000. Following the 28% rule, their monthly mortgage budget would be approximately $2,333. With a favorable interest rate and a 20% down payment, they could afford a home priced at around $450,000. They would need $90,000 saved up for the down payment. They’re roughly $8,300 gross monthly income would come out to roughly $6,000.
Determining the Ideal Home Size
As you contemplate what house you can afford, the size of the home matters. Larger homes generally come with higher price tags due to increased square footage and potential amenities. Carefully evaluate your needs and plans to strike a balance between space and budget. In some cases, the extra square footage is not advantageous. The extra space might be more hassle than benefit if you aren’t raising a family. Lot size and even indoor square footage can be a lot of upkeep to keep maintained and clean.
Unveiling Future Costs
Buying a home isn’t just about the purchase price and down payment. You must consider future costs, like your mortgage payment and any repairs the property will need. Property taxes, homeowners association (HOA) fees, and utilities will also stack up if you haven’t planned for them. These ongoing expenses can influence the type of home you can afford without straining your finances. It’s best to plan this in a spreadsheet where each variable can be tracked and changed.
The Art of Budgeting
Crafting a comprehensive budget is essential. Factor in all your monthly expenses, including the mortgage, utilities, groceries, transportation, and discretionary spending. This exercise will give you a clear picture of your financial bandwidth and help you set a realistic limit for your home purchase. Keep track of what you’re able to put away and save. You should also be thinking about future investments and your retirement. This is a reminder not to pick the most expensive home you think you can afford.
Getting Pre-approved: A Strategic Move
Before embarking on your home search, obtaining a mortgage pre-approval can refine your budget further. A pre-approval demonstrates your seriousness to sellers and narrows down your options to homes within your financial scope. Learn more about loans here.
Your Homeownership Journey
In conclusion, the question, “What house can I afford?” is multifaceted and deeply personal. It’s an intersection of your dreams, aspirations, financial health, and practical considerations. Understand the significance of zip code, income, credit, and future costs to know what you can afford. With these factors balanced, you can better navigate the path to home ownership. Remember, this guide is about finding a home that works for your financial budget now and in the future.
Empower yourself through research and make use of financial tools. Consulting with professionals might be needed if you have complicated debt and assets.
