Buying a home is most people’s dream. It’s part of the American dream and something most people obtain. (Now whether or not it’s their dream home is another story.) Saving up for a home can be a daunting task, let alone deciding what house to buy and where to buy it. You can save and save for a twenty percent down payment but how do know how much twenty percent is? How do you know what you can afford? Here are some tips for deciding what you can afford.
- Figure out your current spending: If you don’t know what you are spending now, you won’t know what you can spend. Calculate your total hard costs: rent, loan payments, car payments, utilities, phone bill, cable/internet, etc. Then throw in anything else that you pay monthly. This is the total of what you spend. Subtract this from your monthly take home pay (this is after taxes are taken out). If the number is positive you are good, you can look for a house that is close to what you pay now. If you overspent, take a look at what you spent and compare that to what you need to save for the price range you are looking at. Then decide if you are willing to be flexible in your price range.
- Browse the web for houses: Browse the web, such as Realtor.com, or drive in your favorite neighborhood and note what you like about that neighborhood. Take what you observed to your Real Estate Agent and your agent can help translate that into your list of needs and wants. Your realtor can then suggest available houses that fit closely to your list of needs and wants. This is a good starting point to see if you need to save more or if you are content with what you have.
- Set aside a house payment: Once you know your budget, set aside money that equals what you think you could pay for a payment. If you can live as you normally do, without too much discomfort then that is probably a good place to start at when looking for a house. If not, you should consider looking in a different price range. Don't forget to include the property taxes and home owners insurance in your monthly payment. Keep in mind these two variables will change every year. Consult with your realtor or loan officer to get more detailed about how your escrow account works.
- Use an online mortgage calculator: Once you know what you are comfortable paying now, there are a variety of online mortgage calculators that work well in giving you a rough ball park of what you can afford. Note that these don’t always take into account your take home pay – they focus on your gross income.
- Go talk to your bank or mortgage broker: Once you think you have an idea your price range, go talk with a banker or mortgage broker about loan options. The housing market has been moving fast, especially here in Marshalltown, and you need to be pre-qualified before you legitimately look at buying a house. They have the actual loan rates, home insurance average cost as well as the property tax information. They can run numbers for you (based on your credit score, down payment, gross income and debt) and give you a hard number of what you can get a loan for and what your loan expenses will be.
This is basics of how you calculate what you can afford. It can be a lengthy process, but you are investing in property. Do your homework, save your money and go buy your home! If you are a first time home buyer, or getting back into the game after many years, see our previous post on the process of buying a home.
How did you decide what you could afford? What is your best tip? Tell us below!