If you are looking to buy a home, you need to know how much you can afford to spend on a home which usually means you need to figure out how much of a mortgage payment you can afford. You can use a house payment calculator which will give you a ballpark figure of what you can ask the bank for in terms of a mortgage.
What the calculator will take into account is primary items such as your household income, monthly debts including your car loan and student loan payments and then the amount of available savings for a possible down payment. You want to understand your monthly mortgage payment and how it is being configured. A rule of thumb for most home buyers is to have enough in your savings that it can cover three months of payments that include your mortgage and your other monthly payments. This rule will allow you to keep your home and keep up on your payment in case of an unexpected life event.
In calculating how much you can afford to spend on a house, you have to compare your total monthly debts including insurance and property tax payments to your monthly pre-tax income.
You could be qualified for a higher mortgage rate due to your credit score, however, this doesn’t always mean you should take the higher rate because you may have a great credit score but you can’t pay that high mortgage if something were to go wrong and you don’t want to be in that situation. A housing expense should not exceed 28% of your monthly income. Your credit score will also determine your mortgage interest rate, which will lock you into your monthly payments for longer and possibly have you paying way above what you wanted and can afford.
You also need to have in mind what type of home you want or are willing to live in, meaning if you want to live in the home you buy for a long time or if it is just a starter home. You also need to choose what you are willing to forgo to live in your new home. If you want a large backyard but can’t afford that luxury and four bedrooms, you will have to decide whether you need the extra space in the house or are willing to look and purchase homes with the outdoor space and smaller indoor space. Or, you can budget and possibly do a lot of renovations yourself, you can buy a fixer-upper that has everything you want but needs renovations.
This is also something you must think about when considering how much you can afford to spend on your home. Are you able to budget in case you need to renovate? You shouldn’t be “house poor” meaning you spend every last dollar you make on your home. You should be able to buy things like furniture and decorations for your home and not be overstressed if an appliance were to break. You also need to know if you want to renovate anything or buy a home where everything is already how you want it.
You also need to research the hidden costs of buying a home such as closing costs, utilities and maintenance to name a few. Overall, buying a home is taking on an enormous debt so you must take the time to crunch the numbers and make sure you have thought about the home and its future costs, not just its right-now affordability.