How Much Can I Afford For a Home? A Brief Guide

Whether you are looking for your first starter home or are upgrading to a large property, the price point is a factor for everyone except celebrities. Before daydreaming about your new house or browsing listings, you need to ask yourself “How much can I afford for a home?” This guide will help you determine that figure.

Consider All Costs

For starters, calculate your income and then examine expenses. Costs to keep in mind include:

• Monthly mortgage and interest over its lifetime
• Homeowner’s insurance
• Utilities, water, gas, and Internet
• Repairs and maintenance costs, which can vary greatly from year to year
• Homeowner’s association fees, if applicable
• Transportations costs, especially if you are moving across town from your current job

These figures will help you determine your debt-to-income ratio. As a general rule, your monthly debt payments should be no more than 33-36% of your income. The term includes things like your mortgage, credit card payments, student loans, and a car lease.

Closing Costs 

Questions to ask when buying a house include the amount of the down payment and closing costs. In fact, many first-time home buyers do not realize that most loans do not include closing costs. These costs can be significant, averaging 3-5% on top of the house’s sale price. However, closing costs are essential, covering everything from title insurance to the home inspection.

Prepare for the Worst

Avoid purchasing the most expensive home that you qualify for; otherwise, you might find yourself pinching pennies to make your down payment and closing costs. Even if your monthly mortgage payment is within reach, you should have some cash in reserve in case of emergencies. This could include the loss of a job, but also cover major repairs in case something breaks.

Calculate Other Investments

When calculating how much you can afford for a home, you must also consider other major purchases or investments in the next 2-5 years. Are you preparing to change jobs or start a business? Are you about to start a family, or are you saving up for a wedding? Will you need to replace your vehicle or add another? Buying a home should be within your budget, but not at the expense of everything else.

Understand Financing Options

In addition to talking to your bank, you should do your research to understand going rates, principal, and interest. Ideally, you should understand the ins and outs of having a mortgage well before signing on the dotted line. Considering questions to ask when buying a house and determining how much you can afford now will help you make a smart decision later.