How much house can I afford?
Some guidelines to help you buy your first home
Buying a home can be an exciting milestone. It can also be a confusing time if you don’t have your finances in order. If you’re starting to think about buying a home, you’re probably wondering how much house you can afford.
From what your payments should be to how much you should put down, there are a few factors to consider to best gauge your affordability. Here’s a round-up of everything you should know about what you can afford.
Crunch those numbers
When it comes to how much you can afford to spend on a house, there are a few key considerations to keep in mind. You’ll always need to start by getting your basic financials in order. Write down your income along with your co-borrower’s (if you have one). Use the net number so you’re looking at your actual take-home pay.
You should then add up all of your monthly expenses. This should include your existing debt, including credit card payments, student loans and auto payments. You’ll also want to estimate how much you spend on things like coffee, entertainment and groceries. These are real expenses and you’ll want to be realistic about how much money you’ll have left after these. Don’t forget to keep money aside for savings and your retirement investments as well.
When you see what you’re left with, you will also want to estimate some numbers for housing utilities, interest, insurance, and assessments, if they are applicable. This will leave a ballpark figure of what your monthly mortgage payment could be. You should also think about how much down payment you can afford when you’re crunching numbers here.
What is the 28/36% rule?
If you look at the money you have left after expenses and think you can spend it all on your housing payments, you may be making a risky financial decision. Make sure you keep enough wiggle room in your budget for saving and for emergencies. You don’t want to become house poor by spending all of your disposable income on your housing payment.
Financial advisors tend to follow the 28/36% rule when it comes to how much you can spend on your housing payment. The rule advises home buyers not to spend more than 28% of their monthly income on housing expenses.
Your housing payment also shouldn’t be more than 36% of your total debt. Your total debt includes credit card payments, car payments, and student loans. This 28/36% rule is a good one to follow to help you know how much you can spend on a housing payment each month.
Clean up your finances
When you’re preparing to buy a home, it is a good time to get your finances in order. You should start by checking your credit score. The United States government allows you to download a free copy of your credit report once a year. You can check your score and see if there are any errors in it.
When it comes to how much you can afford to spend on a house, there are a few key considerations to keep in mind. You’ll always need to start by getting your basic financials in order.
To get the best possible interest rate, you can make some positive financial changes like paying off your debt. Your debt-to-income ratio is a big factor used by lenders to determine your affordability, as well as your interest rate.
By lowering your debt, you’ll raise your credit score and also free up some monthly expenses. Most lenders won’t take on a borrower who has a debt-to-income ratio that is over 43%. Having a lower debt-to-income ratio shows room to take on a mortgage as well as financial responsibility. This will also help you manage your monthly expenses and budget, With less debt, you’ll have more room to breathe and pay your mortgage.
A deeper dive — Related reading from the 101:
Here are a few easy tips to actually trick yourself into saving more money.
These five steps should get you on the right track.