Buying a new home should be exciting, but it should also provide you with a sense of stability and financial security. Living month to month with barely enough income to meet all of your obligations – well, that’s the wrong kind of excitement. For this reason, it is crucial that you know ahead of time the answer to a very important question: “How Much House Can We Afford?”
Determining If You Are Ready
Are you ready to buy a house? Generally speaking, owning a home pays off financially if you will live in it for at least three to five years. Otherwise, there’s nothing wrong with renting. So don’t jump the gun and assume you need to buy a house because everybody else is doing it. The truth is, you might not be ready. Pay attention to the seven signs Forbes reveals as proof you need to reconsider buying a house right now:
- You don’t make enough money.
- You have too much debt.
- You don’t have enough savings.
- You haven’t been on the job long enough.
- You have poor (or no) credit.
- You’re not sure what type of home you want.
- You’re not ready to stick around.
If none of the above applies to you, and you know for a fact that you are ready to call yourself a homeowner, then you have come to the right place. Calculating your housing budget isn’t rocket science, but it does take a little knowhow. We are here to share the basic information you need to determine the answer to your question, “How much house can we afford?”
Budgeting for a House
The key factors in calculating home affordability are (1) your monthly income, (2) available funds to cover your down payment and closing costs, (3) your monthly expenses, and (4) your credit score.
- Your Income – Your income includes the money you receive on a regular basis through salary or investments. It helps establish a baseline for what you can afford to pay on a mortgage every month.
- The Funds You Have Available – This is the amount of cash you have in the bank that is ready and available to use as a down payment and to cover closing costs. You can use your savings, investments, or other sources to help supplement the funds you have available.
- Debt and Expenses – When answering the question, “How much house can we afford?”, it is important to consider all of your other monthly obligations. In your budget, make sure to include credit cards, car payments, student loans, groceries, utilities, and insurance.
- Credit Score – Your credit score and the amount of debt you owe will influence a lender’s view of you as a borrower. Your complete credit profile will help determine how much money you can borrow and the interest rate you’ll be charged. Check your credit score before you reach out to a lender so that you know where you stand.
The 36-Percent Rule
To avoid purchasing a home that breaks the bank, you’ll need to figure out a housing budget that makes sense for you and your family. Try following the 36-percent rule. This rule measures your debt relative to your income, and lenders use it to evaluate whether they will pre-approve you for a home loan.
The 36-percent rule states, “Your total debt payments should never add up to more than 36 percent of your gross (i.e. pre-tax) income” (source). That means that if you earn $59,039 a year, the average household income, you can comfortably afford $1,771 in total monthly payments. When calculating your total monthly payments, remember to include bills other than your mortgage, like home insurance and property tax, credit card debt, and car payments.
If We Can Afford the Home, Should We Buy It?
There’s a lot to consider when purchasing a home. Talking to a lender who can evaluate your situation and help guide you through the process is the best way to determine exactly what you can comfortably afford now and in the future. For example, you might want to buy a little less than you can afford if you are planning for upcoming life events, such as having a child. Either way, the choice is up to you; we’re here to help you make an educated decision.
Are you still wondering, “How much house can we afford?” Whether you’re a first-time homebuyer or well versed in the process, buying or refinancing a home can be an exciting and rewarding experience with PrimeLending. We take the time to listen, and we’ll work with you to find a home loan that fits your needs. Start by using our Home Affordability Calculator to calculate costs yourself, and contact us with any questions you have. We would love to hear from you!