April 5th, 2019 9:14 AM by Jackie A. Graves, President
Good news: Answering the question,
“How much house can I afford?” does not require calculus-level math skills. You
just have to start with Trulia’s housing affordability calculator, and then factor in a set of facts about your
The life stuff is just as important as
the calculator. Things like student loans, local cost of living, childcare, and
your hobbies will affect how much house you can afford. And a mortgage lendercan lend you as much as you can “reasonably
afford,” which could be more than you want to pay. Here’s how to set the right
budget for yourself.
Your house budget is based on how much
you can afford to pay each month and how much you have to put down. While a 20
percent down payment is ideal, the majority of first-time homebuyers actually
put down between 5 and 10 percent.
When deciding how much you’ll put
down, keep in mind how that the amount will affect how much house you can afford.
For one, the more you put down, the less you’ll need to borrow in your
mortgage, and the less you’ll pay each month. Also, if you put down less than
20 percent, you’ll need to calculate private mortgage insurance, or PMI, into
your monthly mortgage payment. PMI is typically 0.2 percent to 1.5 percent of
When adding up how much you have saved
for a down payment, don’t forget to leave room in your savings for closing
costs, which will run 2 to 5 percent of the total cost of the home.
It can be tempting to take the maximum
amount a mortgage lender will give you and buy the biggest, nicest house you
can. But if you have monthly expenses for things that make you happy or things
you need—anything from yoga classes to your health insurance premium—make sure
you don’t take a mortgage that’s so large you have to make lifestyle changes
you don’t intend to make.
Take a look through your monthly
budget to determine what payment would fit into your life today, and base your
house-hunting budget on that intel.
Most people have debt. Because a
mortgage is going to add to that debt, taking the sum of your total debt now
can help you determine how much more debt you should take on to buy a house.
Here are three ways to use your debt to determine your housing budget:
One rule of thumb says you can afford a home
that’s three to five times your household income—depending on your debt. So if
you have $100,000 in income and no debt, feel free to consider that $500,000
midcentury modern ranch you’ve had your eye on. But let’s say 20 percent of
your income goes to paying down debt—then you’ll want to look at homes closer
to the $300,000 range.
including taxes and insurance, shouldn’t exceed 28 percent of your pre-tax
All your debt—including your future mortgage
payment—shouldn’t exceed 36 percent of your pre-tax income.
The interest rate you’ll get on your
loan will help determine your monthly payment. Even a half a percentage point
can make a big difference every month. Your lender will set your interest rate
using a bunch of factors, including:
Type of mortgage (like FHA, USDA, or VA
Interest type ( fixed-rate versus
The federal interest rate does change
over time, and that will also affect your potential interest rate. One easy way
to estimate what yours could be is with the Consumer Finance Protection Bureau’s
interest rate tool.
Where you live determines your
interest rate, property taxes, and more. Take a look at where you want to live,
down to the neighborhood, to determine the unique costs of buying a home there:
Property taxes: These will vary based on your
town and school district. Find out your local tax rate and multiply it by the
assessed value of a home for an estimate.
HOAs: Some neighborhoods and condo developments
have homeowners association fees. If you’re looking in a particular area, leave
room in your monthly budget for these.
With these factors in mind, you’ll be
able to determine your budget. But before you get too far into the home buying process, you may want to understand a bit about your
local housing market so you know when and where to look
for your new home.
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