One of the biggest decisions you will make in your financial life is purchasing a home. The home you choose and the mortgage you qualify for will impact your day-to-day budget for as long as you are paying off your mortgage. In some cases, that could be as long as 30 years. So, it is essential to make sure that you are buying a home you can afford, and choosing a mortgage product that fits your needs.
But how do you know how much home you can afford? There are a few simple steps you can take to make sure you are shopping in the right price range.
In this post, we will go over those steps. But first, let’s talk a bit generally about how much of your budget should go toward housing expenses.
How Much is Wise to Spend on Housing?
If you are just looking for a general rule of thumb for housing expenses, you can use the 28/36 rule. This rule states:
- Your housing expenses should add up to 28% of your income at most.
- All of your debts—including housing expenses and other loans and debts—should add up to no more than 36% of your income.
So, for example, let’s say that you earn $45,000 a year. If that is your total household income, 28% of that adds up to $12,600. That is the maximum amount of money that you should be spending on housing each year.
36% of $45,000 is $16,200. If that is your income, then your housing expenses plus all of your other debts such as student loans, car payments, or personal loans, should add up to no more than that amount.
So, the other debts you have do put some constraints on how much home you can afford. That is one of the reasons why lenders assessing your borrower profile will check your debt-to-income (DTI) ratio.
Detailed Steps to Calculating How Much Home You Can Afford
- First, calculate your income. This step is pretty self-explanatory. Figure out your total income. If you are shopping for a home by yourself, that would just be your income. If you are shopping for one with someone else, that would include their income and yours together. Don’t forget to include income from sources other than just employment. You can estimate investment income and also add in payments such as alimony.
- Next, calculate your expenses. Once you have figured out your income, you will need to calculate your projected expenses. First, figure out all of your existing expenses. Along with your debts, don’t forget about everyday costs for utilities, groceries, taxes, and so forth. Then, try and figure out what your housing expenses would be for a home that interests you. These should include:
• The cost of the home itself
• The amount of interest you will pay
• Insurance costs
• Property taxes
• Fees and closing costs
• Estimated maintenance and repair costs
Added together, all of your expenses should be affordable within your income, and still give you room to keep growing your finances. - Use an online calculator to help you figure out how much home you can afford. Trying to figure out the above on your own can be a challenge. But you will find a lot of calculators and online tools that can help you out. To use these tools, you will usually need to know:
• The down payment you want to make
• The loan term
• A likely interest rate (if you know your credit score, you can look up current rates you might qualify for)
Inputting this information into a calculator along with your annual income and monthly debt payments will produce an estimate of how expensive a home you can purchase. Usually, these calculators produce their estimates based on the 28/36 rule. If there are some inputs you cannot customize, they should tell you what assumptions they are using. Keep in mind that what the calculator tells you is just a guess. Depending on your income and other expenses, you might need to adjust the amount up or down to capture what you really can likely afford.
Have Other Questions About How Much Home You Can Afford?
At Jumpstart Empire Academy, we can answer your questions about budgeting for a home and offer you additional educational resources and recommendations to help you navigate the world of real estate. To contact us today, please call (559) 540-2275.