Securing a Home Loan 101: How Much House can you Afford?

How much house can you afford?

Buying a house is a big decision. It is easy to get carried away, though, so setting a realistic budget up front is important. Look at the purchase price, interest rate, property taxes, and down payment requirements. Before you get your heart set on a house you can’t really afford, follow these steps to keep your expectations realistic.

Look at your Current Income

Keep your mortgage payment to 28% of your gross income (the amount you earn before taxes are withheld). Remember, that mortgage payment is more than just the purchase price divided into 30 years of monthly payments. Aside from the principal amount of the loan and the interest, your property taxes are the next largest expense that comes with a home purchase. Find out your area’s property tax rates and calculate how much that will add to each month’s payment.

Don’t Forget About Other Expenses

By keeping your total mortgage payment to 28% of your gross income, you allow yourself some breathing room to pay other basic living expenses—like food, clothing, and utilities. Many people have additional financial commitments like student loan debt, credit card debt, or small business loans. You must account for any such obligations in your budget. Otherwise, you run the risk of overextending on that mortgage.

Total up these expenses and calculate how much of your gross income is currently going toward these payments. The goal is to keep this total to 36% of your gross monthly income. If you find you are spending more than 36% of your gross monthly income on your extra expenses, you will need to lower the amount you intend to spend on your mortgage payment.

Factor in the Down Payment

You may have heard you need 20% of the purchase price as a down payment. There are plenty of options that allow you to put down less. But you will be in a great position to avoid primary mortgage insurance (PMI) and to secure a good interest rate if you have at least 20% to put down.

Also, put simply, the more money you can put down, the more house you can afford. If you want to find ways to boost your down payment savings, consider these tips.

Look at the Big Picture

Houses are usually the single largest purchase we make. It’s important to do the research ahead of time to set realistic expectations about your budget. Otherwise, you run the risk of being disappointed when you don’t get approved for the loan you thought you could get. Or worse, you get into a mortgage you were not really prepared for, and you become house poor. While it is easy to make home-buying an emotional decision, with some logic and objectivity, you can make a decision that is right for you.


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