Can I Afford to Buy a Home?
Buying a home is one of the most exciting and fulfilling steps to take in the journey through life. It is also likely the biggest step most people will take, whether considered in terms of financial commitment or of making life-changing personal choices. It is important to become well-informed of the costs of home ownership and then take a close look at one’s own finances to see if it is wise to make a home purchase. Once this is done a potential buyer can have a good sense of whether or not he or she is ready and able to make a home purchase; the question then becomes, “What price range do I need to stay within when looking at available homes?”
Fortunately, there are clear guidelines and tools such as a home mortgage calculator for arriving at a wise price range, based on one’s assets and income. The starting point is to create a detailed statement of your income, monthly budget, and assets. Collect copies of your federal income tax forms, pay stubs, bank statements, rental and other miscellaneous income records, etc. and assemble them together with a monthly budget worksheet. You will then have at hand the figures to use as you apply the tools and guidelines to analyze your situation and decide how much you can spend on a home purchase. Collecting your personal financial information is essential at this point, and will be used throughout the home-buying process as you continue on to qualify and apply for a loan. Consider also your credit score, which will affect your ability to obtain a loan at a favorable rate. If you have any doubts, now is the time to check your credit record and address any negative factors before you present yourself to potential lenders.
In thinking about income and affording a home, ask these questions:
- Is my job secure?
- Do I expect to stay with my current employer/business for at least 5 years to come?
- Is there opportunity for advancement?
- Do I have a consistent (minimum) amount of monthly income, or does it fluctuate?
- What other new large budget items do I foresee in my future, such as having a child, paying for college, caring for an aging loved-one, purchasing a car, etc.
- Is my home purchase a lifestyle preference as well as an investment? Is this the right move at the right time?
- Am I including property taxes and home insurance in my monthly estimate?
- Have I added a home maintenance category (approx 2%) to my monthly budget?
- Am I feeling pressured by low housing prices and/or interest rates to buy more house than I should?
- At what point might I feel “house poor” (unable to afford other important purchases/activities due to paying monthly housing costs)?
- If I might have to spend less on other things in order to buy a house, how important are hobbies, pets, travel, restaurant meals, entertainment, etc?
Using the questions above will help in thinking about a possible home purchase. In addition, use your personal financial information along with the affordability calculator to find a specific price range based on the combination of relevant factors.
As a double-check, apply these ratios (below) to your budget to test the spending limit you have decided upon to guide your house-hunting efforts.
- Maximum total debt: 41%. Includes housing expenses plus loan and credit card payments.
- Maximum monthly payment: 28% conservative; 33% aggressive.
- Minimum down payment: 10% (Note: Down payment amounts vary greatly depending on loan program and/or lender. Down payments can range from as low as 3.5% to the traditional down payment of 20%.
If you’re interested in learning more about buying a home, mortgages, or what home you can afford, we recommend you register for our first time home buyer class.