If you’re asking yourself, "what kind of house can I afford?” then congratulations on starting your prospective home search. This is an incredibly exciting time, but before you start shopping it’s important to set realistic and manageable budget guidelines. Indeed, figuring out what you are financially capable of taking on is a critical first step, especially for first-time homebuyers. As you begin your house hunt, ask yourself the questions below and crunch the numbers to understand your limits.
The general rule of thumb is that your monthly home payment should not exceed 28% of your gross monthly income (your household’s combined income before taxes) to live comfortably. For example, let’s say you and your partner together earn $7,000 per month. In this scenario, your monthly home payments should not exceed $1,960 per month ($7,000 x 0.28 = $1,960). In some cases, this dollar amount may include not only your mortgage, but also your homeowner’s insurance, property taxes, or sometimes even association fees.
Again, if we assume your combined monthly income is $7,000, then your maximum monthly debt payment is $2,520 ($7,000 x 0.36 = $2,520). When you consider your maximum total housing payment, using the numbers from above, that leaves $560 in other monthly debts ($2,520 - $1,960 = $560). If your car payment and credit card bills exceeded $560 per month, you would want to consider lowering your maximum monthly housing payment to prevent feeling strapped for cash.
Once you’ve figured out your monthly maximums and considered your current financial situation, you’ll want to begin preparing for a mortgage. There are several factors that may have an impact on your mortgage qualifications including, but not limited to, your credit scores, lenders, interest rates, and market value. You’ll also want to research the types of financing available and determine which is best for your current financial situation and future plans: a 15-year mortgage or 30-year mortgage, adjustable or fixed. If you are looking for security and a guarantee that payments won’t increase, a fixed rate mortgage might be the way to go. If you believe mortgage rates could still fluctuate and you want more flexibility, consider an adjustable rate mortgage.
There’s one more important step in assessing your homebuyer status: considering upfront costs and big-picture finances. Here are some other costs to take into account when determining what kind of house you can afford: