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Buying a home is one of the most serious and significant expenses in our life. That is why it is so important to be balanced and estimate your financial capabilities with a sober look. The key issue for you in a choice situation should be how much of a house you can afford.
You can find calculators to estimate your capabilities online. For example, Zillow and Smartasset can offer you quite transparent calculations. However, they all consider essential financial items and miss small household and situational details that may affect your options when buying a house. So, let’s look at the factors that will help you determine how much you can spend on housing and whether you will pull the current costs on it.
Calculate the Amount for Your New House – Key Factors
Of course, the calculation of money for such a purchase begins with major monetary issues. Everything is much simpler if you have the entire amount of cash to purchase housing. Here, you will have to consider minor factors, which we will discuss later. However, most US residents still use mortgages to buy real estate. And here, you need to consider several factors. Please note that affordability calculators take them into account as well. So, let’s examine them in a little more detail.
Oh, as you understand, this factor is obvious. The more you earn, the bigger and more expensive your future home can be. However, all this is hypothetical, as the circumstances below come into play.
The debt burden is the stop factor that will keep you from running on the total amount of revenue. Everything counts, including your credit card debt, consumer loans, car loans, and even student loans. Banks and lenders are meticulous in this matter, so be prepared because the amount of your debts will be accounted for 10-12 months in advance and even more. Moreover, it often becomes crucial when deciding on mortgages or interest rates.
Debt-to-Income Ratio (DTI)
Today, most affordability calculators include this indicator in the calculation. The point is that the lender needs to see your credit load and ensure that it does not become a heavy burden for you after buying a house and does not interfere with the timely mortgage payment of mortgage debts.
Banks and related services can consider two types of DTI, which are called front-end and back-end. Front-end debt-to-income ratio implies just your monthly mortgage fee, although some are inclined to add insurance and property taxes here. The rate should not exceed 31-36%.
Back-end DTI is already more comprehensive and considers all your debts together with the mortgage payment. Its value should be approximately 43-50%. Lenders also consider the type of mortgage, credit score, and down payment.
This indicator allows banks to trust you more – or be on guard depending on its numbers. The value of your credit score depends on the number of loans you have borrowed, their timely repayment, and whether there are delays or not. A high value (most lenders favor somewhere after 640) will allow you to get a better chance of mortgage approval and a favorable interest rate.
Down payment is one of the critical conditions for reducing the credit burden. The more money you can pay at once when you buy a house, the less mortgage you will need. This means you can get even more money to buy a more expensive home. Try to save up more than 20% of the house price for it, and you do not have to spend on mortgage insurance, which is also a delightful bonus.
And Other Crucial Aspects
So, you figured out the estimated amount you could pay for the house, which made you happy. You learned the size of your monthly mortgage payment, which encouraged you. However, it is too early to sigh with relief. Now you need to know how much you will spend on what is not in the calculators, but without which, all the calculations are just hitting the sky.
We hope you still remember about the taxes, as now it is with you for the following years. You can prepare in advance and find out all about the property tax rates in the metro area where you buy the property. Rates vary between 0.30-2.13% of the house’s market value. Residents of some metro areas are entirely exempt from property taxes, but you need to know this for sure.
The house is almost at your disposal, but you go on paying. Well, it can’t be helped as the closing costs are an integral part of the deal! As a rule, expect 2-5% of the property value, so include this amount in the estimate of your financial capacity. So, when paying closing costs in cash from the amount per house, you reduce the initial fee and, accordingly, reduce the parameters of the housing you can afford. However, if you include this amount in the mortgage, you also do not win anything, as the house purchase will take all the same money. Paying extra interest will not be a reason for joy, either.
Do you buy with cash or save up to 20% for the down payment? Skip this item, then. As for all the others, we offer them to plan their mortgage insurance over the next few years. They amount to 0.17-1.86% per year for every $100,000 of the loan. So, for example, with a $250,000 loan, your insurance payment will be $35-372 per month.
Be ready for these expenses if you receive a conventional loan with a down payment of less than 20% as well. You have to pay PMI (private mortgage insurance) as well. We recommend postponing the house purchase until you get enough down payment and a good credit score. This way, you can reduce PMI and its payout period.
This payment may depend on your metro area’s environmental and crime rates. The more lawsuits its residents file, the more it will cost you. According to statistics, the average annual premium across the country is just over $1,100 per year for a house estimated at $250,000. Consult your local insurance agent for more detailed calculations.
Homeowners Association (HOA) Fees
Study this aspect for your home, especially if you buy in a condominium or townhouse. Payments depend on the level of amenities and services provided, as well as the house’s upkeep. Try to find out as much as possible to avoid unpleasant surprises.
By the way, utilities are another essential expense item. Fees can vary even from quarter to quarter, not to mention moving to another metro area. Consult your would-be neighbors about utility bills, or ask your realtor to look into it.
Affordability calculators do not consider this, but it is a matter of your confidence. Make sure that your buildup amounts to 3-6 months of your income to survive unforeseen situations. Try to keep your savings from spending on housing, moving, or deal costs. In extreme cases, use as little as possible from your cash reserve.
If you plan to purchase in a shared building, it will be easier for you. It is HOA who will do it. Buying your own home means you’ll be painting the walls, renovating the roof, and fixing the communication problems, which will entail certain costs. Experienced homeowners recommend focusing on the amount of 1-4% of home value per year. However, it is a rough calculation as everything depends on the condition of the house and the changes you want to make.
Now, you owe a house, but life goes on. It means that you and your family still want to eat well, do hobbies, wear new clothes, and travel. We remember health insurance, treatment, and retirement contributions as well. Lenders don’t pay too much attention to this aspect when deciding on mortgages, so take care of yourself and your loved ones. Consider whether you have enough money left to ensure the usual comfort – or lower the bar with little stress.
What Can I Do if I Want a Better House than I Can Afford?
Let’s be honest. Sometimes, we all dream of living in a palace, even when there is enough money just for a small two-bedroom house. But let’s look closer to reality. Indeed, the desire to buy a home that is better and bigger than you can afford right now is, to some extent, reasonable because it is a long-term investment.
By allowing such a property, you will want to use it longer and forget about the upgrades for the next couple of years. In general, this situation is solvable. However, you will have to take some steps and make financial sacrifices to save up a more significant down payment or the entire amount of cash. The experts consider the following actions reasonable:
- Cutting the spending on travel, hobbies, or clothes. Afford a little less entertainment for a larger purpose. After all, it’s just for a few years.
- Giving up the idea of buying a second car or a car at all. This is a big purchase considering the cost of insurance, fuel, and taxes. Adding this amount to the down payment is more efficient here.
- Getting extra income from your second job. It’s a great option if you have enough time and effort. Besides, this is another chance to reveal your abilities, which can affect your career opportunities in the future.
- Paying down loans and credit card debts. The less debt you have, the higher your credit score is and the more money you can spend on your home. Try early repayment to improve your chances of buying your dream house.
Counting the house you can afford is a combination of apparent payments and a host of associated costs. Calculate your upcoming spending carefully, be reasonable when assessing your finances, and never rush! Also, take your chance to contact realtors or consultants or talk to those who have purchased the house recently. The more information you have, and the more detailed your calculations are, the better chance you get to buy a place that will please you for many years – with its look, comfort… and affordability!