Once you decide to buy a house, the first thought that crosses your mind might be, “I can’t wait to house hunt!” only to be quickly followed by, “How much house can I afford?” As you start the process to buy your next house the “b” word—budget—is always top of mind. When in doubt, using a home affordability calculator can help you get an idea of your potential price range. Let’s dive into some home affordability details.
HOW TO SET A BUDGET FOR BUYING A HOUSE
We have all set a budget at some point in our lives, whether we’ve stuck to them is a different story. But don’t some things just seem better when you know you got a good deal on them—like vintage clothes, a car, and your home? Not only does setting a homebuying budget help you narrow down your home search, it may also lead to more affordable payments in the long run.
Calculating home affordability is the first step to knowing what kind of a budget you’ll have to work with. If you are doing the math on your own, a rough estimate of what you can afford home-wise is 2.5x your gross annual income. However, there are more factors to consider when planning your homebuying budget like a down payment, closing costs, and on-going home-related expenses.
BUDGETING FOR DOWN PAYMENT AND CLOSING COSTS
When you plan your budget to buy a house, it is important to factor in upfront costs like a down payment and closing costs as they both impact how much house you can afford. Both of these costs are part of the home buying process but are not part of your mortgage. However, your down payment and closing costs will depend on the type of mortgage you get.
Don’t believe every mortgage myth you hear—you don’t have to put 20% down to get a mortgage. In fact, some mortgage lenders have loans that require as low as 3% down while others have 0% down payment options and offer down payment assistance programs*. The most common low- to no-down payment options are government-backed loans such as FHA, VA and USDA mortgages.
Typically, homebuyers can expect to pay 2-5% of their mortgage cost in closing fees. Common closing costs may include taxes, appraisal fees, and record filing, among other fees. In addition to down payment assistance programs, some lenders may offer closing cost assistance*.
WHAT OTHER HOME-RELATED EXPENSES SHOULD I ACCOUNT FOR
Aside from your upfront mortgage-related fees, there are some additional expenses that go along with buying a home. These can include:
- Property taxes
- Homeowner’s insurance
- Homeowners’ association (HOA) fees
If you made less than a 20% down payment, and depending on the type of mortgage you received, you may also have to pay either private mortgage insurance (PMI) or a mortgage insurance premium (MIP). Understanding how this may apply to you is easier with a mortgage professional by your side. Talking with your local PrimeLending loan officer can help you get an idea of what mortgage you can afford.
Don’t forget to plan for your home maintenance needs too! You never know when a faucet might spring a leak nor can you predict when your water heater will go out, but you can be prepared for any maintenance need the comes your way by creating a maintenance budget before buying your house. These things may be discovered during the home inspection process which can help you plan accordingly.
HOW MUCH TO I NEED TO SAVE EACH MONTH TO BUY A HOUSE
One of the biggest mental hurdles some people have trouble overcoming when it comes to understanding their home affordability is worrying about how much to money to save each month. There is no right or wrong amount of money to begin saving for a home. And, depending on your living expenses, it may be easier to save some months than others.
Typically, lenders recommend keeping the cost of a mortgage payment to 28% or less of your gross monthly income. To help you get started, add up your monthly expenses. Some common monthly expenses to keep track of when budgeting are:
- Rent or current mortgage payment
- Recurring debt payments (car payment, credit cards, student loans, etc.)
- Groceries
- Transportation
- Incidentals (movies, dining out, etc.)
While there may be other expenses you have each month, the list above is a good start that can give you an idea of what you spend each month, and what you have left that you could save.
There are many factors at play when it comes to home affordability. Taking a trusted mortgage professional with you on your homebuying journey can help make the process feel easier. Connect with a PrimeLending mortgage expert today to discover how much home you can afford.
*Certain restrictions apply, subject to down payment assistance program guidelines. Not available in all areas. Please contact your PrimeLending loan officer for more details.
