It typically starts as a fleeting thought – in and out of your brain before you can really grasp it.
But, as time goes on, as the landlord becomes more demanding or the threat of yet another rent hike becomes unbearable, the idea of owning your own home may become so overpowering that you finally look into the feasibility.
Can I afford it?
It’s not as hard to figure out as you may think. Get out your calculator and let’s crunch some information.
Get in the right mind-set
One mistake we frequently see with our renter-to-owner clients is that they use more caution with their monthly budget when buying a car than they do when buying a house.
Think about it: The amount of your car payment is the leading factor in deciding how much you’ll spend on a car, right?
Since a house payment is far larger, you should use this same yardstick when determining how much you are willing to pay for a house.
Even if you’re approved for more, stick to looking at homes priced within your monthly budget.
Before you know how much you can spend, you need to get crystal clear on your income and your debt. How much comes in every month and how much goes out? And, is there a chance that either will increase or decrease in the future?
For instance, if you’re planning on starting a family, your debt level will increase. If you’re finishing up a college degree for that better job you’ve been hankering for, your income may increase.
Get clear on not only the full picture of your current financial reality, but how it may or may not change down the line.
Start with your current income
Dig out last year’s tax return or your pay stubs to figure out how much money you have to spend each month (your take-home pay).
Do the same for any other income earners who will be co-borrowing with you for a home.
How much of that income is spent on debt?
Now let’s figure out how much of that income is spent every month. Add up your payments for the following:
- Credit card payments – since these sometimes vary, use the minimum monthly payment amount listed on your statements.
- Alimony payments.
- Child support payments.
- Installment loan payments (such as for a car, personal loan or student loan).
These are the debts the lender will scrutinize, but for budget purposes, you need to know the total amount of money you spend every month, so also add in:
- Commuting expenses
- Dining out
- Pet expenses
- Any other routine expenses
Don’t include your current mortgage payment or rent. Subtract the sum of your expenses from your income.
This is how much money you have every month to pay for housing. Financial experts typically recommend spending no more than 30 percent of your before-tax income on rent or a mortgage payment.
If your result appears to be too low to afford a home, look for ways to trim your budget. Then, visit your accountant or tax specialist.
He or she can run the numbers on different scenarios that include the tax benefits of homeownership which may paint an entirely different picture.
If, on the other hand, your finances appear to be set for homeownership (and your credit profile as well), you’ll need to ensure that you have enough money for the actual purchase process. This includes a down payment and closing costs.
The amount you’ll need for a down payment depends on the loan program you decide to use. If you’re a qualifying veteran or you use a USDA Rural Development Loan you may not have to pay anything. Otherwise, plan on paying from 3.5 to 20 percent of the loan amount as a down payment.
The amount of money you’ll need at closing depends on a number of variables. For instance, many home sellers will pay a portion of the buyer’s closing costs. In 2016, homebuyers paid, on average, $3,815 for closing costs, according to ATTOM Data Solutions.
Home prices have skyrocketed since 2016, however, so plan on paying more than that (unless the seller agrees to help you pay closing costs).
A note on the down payment
If you’re short on cash and long on the desire to own a home, you may want to consider trying to qualify for one of the many down payment assistance programs available.
Reach out to us with any questions. We’re happy to help.