How much house do you think your family can afford?
Houses are typically the most significant purchases that a family makes. Figuring out how much you can afford is one of the first steps toward a home buying budget.
If you follow these steps, then you can get an approximation of how much house you can afford right now.
Step #1: Know Your Monthly Income
Start your budget by determining how much you, your partner, or another co-buyer earns each month. Unless there are specific reasons why you shouldn’t include them, all revenue streams like investment profits and alimony should go into this figure.
Step #2: List Your Costs
Now you will want to make a list of your total housing costs. This figure should include property taxes, insurance policies, and the estimated mortgage interest rate that you will pay. Most families pursue a 30-year mortgage, but there are different lending products available. A shorter loan will result in a larger monthly payment, but smaller interest payments and better rates.
You’ll want to make sure that your total down payment gets figured into this rate.
Step #3: Tally Your Expenses
This part of your budget is the money that goes out to other creditors each month. You must be accurate about how much you’re spending because this will dictate the amount of house that you can reasonably afford.
Additional Steps to Take for Your Home Buying Budget
Maximizing your income to buy your dream house is the worst decision you can make. There must be enough room in your budget to manage unexpected expenses, emergencies, and still save something for your retirement.
That means most families should not be spending more than 28% of their gross monthly income on housing expenses. You should also not have more than 36% of your income already claimed by debt of some type. That means student loans and car payments can impact the amount of house you can afford.
Depending on where you live, your income levels might cover a mortgage or cause you to fall short. Even if a lender is willing to write a loan that takes up a significant portion of your wages, it may not be in your best interest to pursue a house. Work on raising your credit score, improve your debt-to-income ratio, and save up for a down payment of 20% if possible.
When you can follow these steps, then your home buying budget will be easier to implement.