Buying a House? How much house can you actually afford?

Buying a house is not just about putting a roof over your head, it is also an investment, the equity you build in the house over the years can end up being a significant portion of your financial well-being in the future. 

The process of buying a home can be a bit overwhelming, after all it is probably one of the biggest purchases that you will ever make. Here is a quick overview of what you need to think about before buying a home.

How much house can I actually afford?

While you probably have a good idea of what kind of house you would like as well as the square footage, bedrooms and bathrooms that would be ideal, the big question is usually, how much house I can actually afford. 

There are numerous calculators on the Internet that can help you determine how much you can afford for a mortgage each month, but you can also break out a pencil and paper to do the calculations.

Consider all of your monthly expenses when doing your calculations. These are just a few expenses to take into account:

• Car payment
• Credit card debt payments
• Gym memberships
• Child support payments
• Other loans

These are just a few examples, there are plenty of other expenses you may need to include. The goal is getting an accurate picture of exactly how much money you have on a monthly basis to put towards a mortgage. 

The general rule of thumb that most experts recommend is that your monthly mortgage payment should not exceed 25 to 28 percent of your annual income divided by 12 months. As an example, if your annual income is $75,000 you should keep your mortgage payment around $1,562.

However, your need to add a few new expenses into the calculations. Property taxes, mortgage insurance (if necessary) and homeowners insurance are monthly costs that come with homeownership and you need to include those in your calculations when determining your true budget. 

One other consideration is the size of your down payment as it will impact your monthly mortgage payment. In order to avoid private mortgage insurance, you need to have 20 percent of the purchase price as a down payment. Obviously, the more money you have for a down payment, the lower your monthly mortgage payment. 

Saving Up For a Home

Saving for a home can take time, effort and financial discipline. Your main goal should be saving money for a down payment and getting your financial house in order, your credit rating can play a big part in your interest rate so if your credit score is less than stellar it’s time to start working on it. Here are a few tips to help maximize your savings.  

• Set up a practice mortgage: Pretend you already have a mortgage and pay that amount into a savings account. This will help you determine if you can easily afford the new amount or if you need to cut some monthly expenses to cover it. Make sure your budget is realistic. Being house poor is no fun and can quickly lead to regret over your home purchase. 

• Consider a side gig: If your regular job doesn’t allow you to save quickly enough for your down payment, consider a side gig to help supplement your savings. Uber and Lyft are probably the best know side gigs, but you can also earn extra money pet/house sitting, filling out surveys or even renting out your car. 

Side hustle money should only be used towards a down payment, the income is often too varied to be considered for your monthly mortgage payment. You don’t want to come up short on your mortgage payment because your side job didn’t bring in enough money. 

• Get your credit in order: Mortgage lenders will use your credit score to not only determine if you are eligible for a mortgage, but to also determine your interest rate. Lower credit scores pay a higher interest rate due to the risk they present. If your credit score is not great, get to work improving it. Pay bills on time, cancel unnecessary credit cards and restrict new loans or credit cards. Get a copy of your credit report and review it for mistakes. If you find any, ask the credit reporting agency to correct it, this can bump your score up quickly. 

• Get pre-approved: Once you are ready to start house hunting you should get pre-approved by a lender. This will ensure that you are ready to buy a house and give you a very accurate budget so you know exactly how much house you can afford and a range for your monthly mortgage payment.