Find Out How Much Home You can Afford
Calculating how much home you can afford doesn’t have to be complicated if you adopt a systematic approach to the entire process. There are two factors to be considered here – the amount of money you can borrow and the amount you can give as down payment.
If you are buying a home for the very first time, a detailed look is needed at your personal finances, so you can arrive at a figure, which designates the amount you can allocate for purchasing a home. Here are some pointers to keep in mind:
- Assess your income after deduction of taxes, contributions towards your retirement account, social security withholding, and clearing payments associated with credit cards. Monthly expenses are also part of the paycheck, so after subtracting these expenses, the amount left is the maximum sum you can pay for a home.
- How much cash is at your disposal for a down payment? This figure influences the kinds of loans you qualify for. Try to make a higher down payment if you have sufficient funds, as it increases the possibilities of lower interest rates on the home mortgage.
- Figure out how much you can spend for closing costs, which have to be factored in when the deal on the house is closed. The amount is divided among the seller and buyer.
- How ready are you when it comes to writing a check for the earnest money? The “earnest money” is used for denoting a cash deposit that is given to the seller to solidify the deal by securing an offer to buy the property. In case the buyer chooses to withdraw his offer, the amount is generally forfeited.
- The mortgage payment you can afford every month is important. The 28/36 rule is usually applied to compute the figure, which states a maximum of 28% of the gross monthly income is to be spent on total housing expenses and the amount spent on total debt service shouldn’t exceed 36%.
- Although you have sought the guidance of your mortgage lender, it is best to follow your own advice when it comes to what you can and cannot afford. Unscrupulous lenders might encourage you to apply for a loan, so they can reap in benefits.
There is no hard-and-fast rule that can churn out a magic number to predict how much home you can afford. However, you can get a concrete idea if you use a financial calculator, to give you an estimate based on loans and personal finances.