Before you hop in the car or on the computer to check out recent offerings for residential properties on the market, it’s best that you first fuel up on knowledge to keep from being stranded on Frustration Freeway halfway to your final destination: Homeownership. Wyndham Capital Mortgage wants to help you know how much home you can afford before you get too attached to any properties you see.
Guide: How Much Home Can You Afford?
The 36 Percent Rule
To put this topic simply, one popular rule is to make sure your financial obligations and debts don’t exceed 36 percent of your income before taxes are taken out. The reason for this is lenders start to cringe at the idea of offering a loan to a borrower who has a bad debt-to-income ratio. While this isn’t a strict and immutable rule, it’s most certainly a good place to start when determining how much money to spend on a home. Not only is this beneficial to lenders, it’s good for you and your finances as well. Now, on to a more in-depth analysis.
See the Situation From a Lender’s POV
Looking at your financial situation the same way a mortgage lender will is also a good idea. Specifically, lenders look at a borrower’s:
- Down payment for the home
- Financial obligations
- Credit rating
Do yourself a favor and gather all of this information and take a long, hard and honest look at your lifestyle and your finances. Determine how much you can contribute for a down payment and how much of your monthly income you can devote towards a monthly mortgage payment. Again, be honest (brutally honest, in fact) about what you can afford.
It’s also a good idea to always have at least three months’ worth of your mortgage payment in your financial reserves at all times. If you can do six months, even better. Should you experience a sudden loss of income in the future, you can rest easy knowing you have your mortgage covered for a few months.
It’s the Little Things
While you’re determining your down payment and how much of a monthly mortgage you can afford, be sure to account for the extra costs involved with being a homeowner. Such costs include:
- Property tax
- Home insurance
- Condo/HOA fees
These individual costs can seriously add up, and mishaps like a broken down HVAC unit, water heater or washer can take a massive bite out of your finances and potentially wreck your budget. Make sure you’re prepared before making an offer on a home.
Sometimes It’s Good to Aim Low
Once you’ve got a firm idea of how much home you can afford, don’t be afraid to look at homes priced below your maximum. You have to remember that you want to give yourself some room to negotiate in case there’s a bidding war for a property you like, and there could also be renovations or upgrades that need to be done before the home is truly habitable. Even if you don’t have to make a bid for the home or make any changes to it, you can use the extra money to pay off your mortgage early or simply put it back in your savings account. Homes are a great investment, but they shouldn’t suck up every extra penny and dime you have.
Don’t Be in a Rush
Don’t let yourself become caught up during the home buying process. Sit back, relax and enjoy it a bit (if that's possible). Postponing a buy to save up a larger down payment is a good idea if you’re content with your current living situation. Remember that you want a majority of your mortgage payments to go towards the principal rather than the interest, and you can pay off more of that principal by waiting a few more months to save up more money.
Hopeful homeowners should always look at their financial homes before checking out residential homes. Both are linked in more ways than one. Looking for a little more guidance? Let us help.