How Much House Can You Actually Afford?
Before beginning the home search, it is important to determine how much you can actually afford to spend. Just because a lender may approve you for a certain mortgage, doesn’t mean it is necessarily a good fit. While online calculator tools may be a good starting point, they don’t take into account your personal financial situation. How do you determine how much house you can actually afford? Let’s dive into the details:
Financial Rules May Not Apply to Your Personal Situation
Have you ever heard the sage advice, 'your mortgage payment shouldn't take up more than 35 percent of your monthly income?' What is your monthly income? If you aren't sure what your monthly income is, how can you determine what 35 percent of that number is? While monthly income seems like a straightforward number, it isn't! The truth is, your monthly income depends entirely on your financial situation. Are you paying off debt? What monthly payment obligations do you have? How much have you saved for a down payment? Your real monthly income is the amount you have available after you take into account loan payments, housing costs, and other monthly debt obligations. In other words, it is the amount you have left after you pay your daily living expenses.
An online mortgage calculator can give you a rough estimate of how much home you can afford if you have high credit scores and a clean financial background. However, these tools are only as accurate as the information you provide. To ensure an accurate estimate, make sure you are honest about daily living expenses (food, gas, etc.), debt, and income.
Your Lender May Overestimate What You Can Actually Afford
To approve a new mortgage, a lender must determine how much you can 'reasonably afford' to repay. Now, keep in mind that reasonable is a completely different word than actual. To determine a reasonable mortgage, your lender takes into account your income and any current debts you pay each month. Here’s an example: If you make $4,000 a month after taxes and need to pay $200 to your student loan each month, your lender may conclude that you can reasonably afford a mortgage of $1,500. However, these are the only two things they take into account. In this situation, you would have $2,300 to spend on daily living expenses. Which, depending on where you live, may be reasonable. But what are your financial goals? Do you want to start saving? If you spend too much of your monthly income on a mortgage, you may be strapped for cash and find yourself counting pennies every month. Just because your lender says you can reasonably afford that mortgage, doesn't mean you should automatically assume you can.
Only YOU know what you can ACTUALLY afford – AND, what feels RIGHT to YOU
You are the only one that can determine what is comfortable when it comes to your monthly budget. Before committing to a monthly mortgage number, determine what number fits in YOUR personal budget. If you don't have a budget, make one! From there, determine what number is a comfortable fit for you and your lifestyle. Decide what you can live with and what you can live without. And, don't forget your long-term financial plans!
Here are a couple of questions to help you determine what you can afford:
Keep in mind; the higher your down payment, the smaller your monthly mortgage. Depending on your situation, it may be smart to wait until you have more money saved up to buy a house.
Always consider YOUR personal financial situation before rushing into purchasing a home. Your financial goals and lifestyle determine what you can ACTUALLY afford!
Do you have any questions? I’m always available to help; give me a call anytime.
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