Before you start looking for your new home, you need to know what your
price range is. But how do you determine what you can afford?
Your Budget
Building a budget is no fun, but to make sure you don’t overextend
yourself, you need to make sure you know how much you can truly afford
to pay toward your mortgage each month.
To begin, add up all your monthly expenses other than your house payment.
In addition to the big items -- loan payments, groceries and savings
– don’t forget the little things. How much do you spend
on transportation? Going out to eat? Dry cleaning? The little items
add up, so to really be accurate try to track every penny you spend
for a week, and base your spending on that.
Now that you’ve got your monthly expenses other than housing together,
subtract that from your pay. This will give you an idea of what kind
of mortgage payment you can afford at your current spending level. If
the number is smaller than you thought it would be, you need to decide
what’s most important, and make that your spending priority, cutting
back in other areas.
Keep Housing to 28 Percent of Income
A simpler way to gauge how much you can afford each month is to use
a percentage of your income. A general guideline that many lenders use
is that no more than 28 percent of your total monthly income should
go toward your mortgage payment (including taxes and insurance) and
that no more than 36 percent of your total income should go to pay total
debt, including credit cards. For example, if your monthly gross income
is $4,000, then 28 percent, or $1,120, would be your total housing expense.
In some areas, such as California, lenders expect a greater portion
of income to go toward housing expenses. However, the closer to the
28 percent guideline you can get, the better off you will be.
Also remember that your housing expenses go beyond your mortgage payment.
Your total monthly payment will include property taxes and homeowner’s
insurance, and for some people private mortgage insurance (PMI). It
also costs money to maintain a home, so make sure you leave yourself
room to pay for home improvement projects and regular maintenance. If
you are moving from an apartment to a home, consider whether you will
need to buy more furniture or purchase appliances. Most people find
that they spend a lot more moving into their new home than they anticipated,
so give yourself room in your budget so you can make your new house
your home.
Your Price Range
Once you have your budget, you can use an online home affordability
calculator to help you determine what price home you can afford. Just
remember, calculators don’t take into consideration your entire
financial picture. For example, if you have a lot of debt, the monthly
payment you can afford may be less than what the calculator tells you.
Conversely, if you are putting down a large down payment, you can probably
afford a more expensive home than the calculator suggests. To really
know what you can afford, you need to get pre-approved by a lender.