How Much House Could I Afford
How Much House Can I Afford to Buy?
by Brandon Cornett, © 2009
How much house can I afford to purchase? How much of a mortgage can I afford to take on? By far, this is one of the most common questions we receive from first-time home buyers. But in reality, there is no way we can answer this question. The best we can do is tell you how to answer this question for yourself, and that's the purpose of this article.
Here's the key lesson I want you to take away from this article, and it's something you will hear me say over and over again. You are the only person who can determine how much house you can afford to take on. A real estate agent cannot determine this for you, nor can your mortgage lender. Your lender can tell you how much of a mortgage loan you are qualified to borrow, but that's it. Their duties end there. They are not your financial advisor. So let's talk about the steps you can take to determine how much house you can take on.
Set Your Home-Buying Budget Early On
You should establish your budget early on in the home buying process, long before you start talking to lenders. Failing to do this in advance is one of the biggest mistakes a home buyer can make. The worst thing you can do is go to a mortgage lender and say, "What can I afford to borrow?" A lender might actually approve you for a bigger mortgage loan than you can comfortably afford. It happens all the time. In fact, it's the number-one cause of foreclosure in the U.S.
In the next few paragraphs, I'll explain the steps you need to take to set your home buying budget. It's critical that you take these steps before shopping for a mortgage loan.
Finding Out How Much Can You Afford
The best way to figure out how much house you can afford is by examining your monthly expenses versus income. Subtract your monthly expenses from your monthly income (after taxes), and you'll have a general idea of what you could afford to pay toward a mortgage each month.
Your list of monthly expenses should include:
- Car payment and auto insurance payment
- Grocery costs and other shopping expenses
- Credit card payments and other monthly loan payments
- Any ongoing healthcare costs you have
- Whatever you put toward savings and retirement each month
- Entertainment / leisure expenses (dining out, movies, etc.)
By the way, if you are currently renting a house or apartment, you can leave that monthly expense off this list. Obviously, that expense will disappear as soon as you buy a house. Hooray!
Add up the monthly expenses from the list above, and then subtract them from your net income (i.e., your take-home pay after taxes have been taken out). The number you are left with represents the amount you can afford to put toward a house / mortgage payment. You should not exceed that amount when taking on a home loan. If you do exceed that amount, one of two things will happen:
- You will increase your income in some way, possibly by taking a second job.
- Or, you will begin to fall behind on your mortgage payments and face foreclosure.
This is not the kind of position you want to be in. It's often referred to as being "house poor," and it happens to thousands of new homeowners every year.
Here's how it usually works:
The home buyers have a pretty good idea of how much house they can afford to buy. In the beginning of their home buying process, they have every intention of staying within that budget range. But then they visit a property that's slightly above their budget (or maybe even a lot above it), and they fall in love with the house. "It's everything we dreamed about!" So they buy the place, and the next thing they know their life is one big sacrifice. No more dinners out. No more vacations. No more extra money to put aside into savings each month. In other words, they have become house poor.
It's in your best interest to avoid this kind of thing, and you can do it through proper research and planning. It also helps to be realistic about your budget, through every step of the process. Buying more house than you can afford is a recipe for financial hardship.
Using Mortgage Calculators
Let's say you have followed my advice and determined your home buying budget early on. You've added up your monthly expenditures and subtracted that amount from your monthly net income. Now you know how much you can afford to put toward a mortgage payment each month, at least approximately. You can now "reverse engineer" the asking price of a particular house to see if it's affordable for you. Mortgage calculators make this quick and easy.
You can use one of these calculators to break down the price of a home into monthly mortgage payments. You can even factor in the type of down payment you have, as well as the interest rate on the loan. Of course, you won't know the exact interest rate until you Get your free quote. But you can use the mortgage calculator with average interest rates, and that will give you a general idea of the monthly payment size.
The Home Buying Process:
Types of Resale in Tampa's Market
Taxes, CDD, HOA and Homestead:
