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Once you have decided to buy a home, you will need to determine how much home you can afford to spend to purchase that home. Unless, you are paying cash for the purchase, you will need to consult with a loan lender on what you can qualify for in terms of a mortgage. It is important to note that the maximum amount that you may qualify to receive does not necessarily mean it is what you can afford. Rather than considering the total dollar amount, look at the monthly-related expense and compare that amount to your monthly net income. This will help determine how much home that you can afford.
Mortgage lenders generally look at the amount involved in paying the mortgage. When assessing your ability to pay, lenders include expenses such as the principal, mortgage interest, real estate taxes, homeowner’s insurance, any mortgage insurance or homeowner’s association fees. However, lenders do not include home-related expenses such as utility expenses as well as general maintenance and repair-related expenses in owning a home. It is difficult to estimate the specific amount that you may need for maintenance and repairs; however, an anticipated annual cost of 1% of the value of the home can be used as a general rule.
Additionally, you should also include your daily living expense items such as gasoline, car maintenance, groceries, restaurants and entertainment, vacations, gym and clothing. Having an idea of the monthly cost of such items will help determine what you can afford. You should include these costs in your monthly debts to give you a realistic picture of how your money is being spent.
However, you should also include the need to save for emergencies and retirement. Financial experts generally believe that you should have up to six months of expenses in savings. This includes your total housing payments and all other monthly expenses. This should protect you from defaulting on a mortgage should your income stop. In addition to saving for emergencies, you should factor in a fixed amount to save for retirement each month.
Your long-term goals should also play a role in how much house you can afford. If you anticipate your income changing in the future, you need to plan for the worst-case scenario. By so doing, you will be in a better position to cover your mortgage payments.
As a general rule, home buyers seeking a mortgage have been well served by the 28/36 rule. This rule states the following:
*Monthly housing costs which include mortgage payments, insurance, property taxes and condo or association fees shouldn’t exceed 28% of your monthly gross income.
*Monthly debt payments including credit card bills and student loans shouldn’t exceed 36% of your monthly gross income.
In addition to considering your housing costs and debt payments, you also need to determine how much you have for a down payment. The more you are able to put down as a down payment, the more home you can afford. A higher down payment will also lower your monthly mortgage payments and even reduce what you may pay for private mortgage insurance (PMI). Paying more upfront is always a good way to ensure your mortgage payments don’t become a financial burden later.
Prior to applying for a home mortgage, you should know your credit score and history, The higher the credit score and better your credit history, the more likely that you will be able to qualify for a lower interest rate and a lower down payment. In addition to checking your credit score, you should ask your lender for a mortgage pre-qualification letter. This essentially is a bank telling you how much money you can qualify for in terms of a mortgage. However, as previously stated, this amount is not necessarily what you can afford.
Hope you have found this to be of value if you are thinking of jumping into the real estate market. If you have an interest in buying and/or selling residential real estate in South Florida and not currently working with a Realtor, please do not hesitate to contact me via email at JayKenney@SFPropertyTeam.com or on cell at (954) 547-9483. Many Thanks
Jay Kenney
