Can I Afford a House?
The question, ‘Can I afford this home?’ seems for the most part straightforward. You either can or you can’t. But what goes into determining the answer is where the complexity sets in. Below we have compiled a list of 5 important things to keep in mind when determining if you can afford a home or mortgage that you are interested in purchasing.
Income before taxes is one of the most important factors in determining if you can afford a home and mortgage payment. But “income” doesn’t only refer how much you make per year before taxes. Income should also be evaluated by job security (the probability that you will keep your job), opportunity for raises and bonuses, confidence in keeping steady commission if your job operates off of this, chances that salary will stay the same or increase, and other considerations such as if you are planning on having kids soon.
Monthly spending or your typical monthly budget is another factor that should be evaluated when determining if you can afford a house. Living expenses such as bills/utilities, transportation, health, fitness, home, kids, travel, personal care, pets, shopping, taxes and other expenses should be calculated, multiplied by 12, and then subtracted from your income to get a clear picture of how much money you have left to work with. It is extremely important to be honest with yourself when calculating your monthly budget.
Down Payment & Closing Costs
Monthly mortgage payments are not the only thing that you have to worry about paying when you plan to purchase a home. Once you decide on a home and have calculated your monthly spending and compared it to your yearly income, the next things that should be considered are down payments and closing cost. According to Mortgage 101, ‘Traditionally mortgage down payments range from 10 to 25 percent of the total purchase price of the property.” However, there are now more options that can potentially lower your down payment that our loan officers can help you decipher and apply for. Just as a rule of thumb, it is best to prepare to pay within that percentage for a down payment.
Along with a down payment, closing costs should also be considered when determining if you can afford a home. Closing costs vary individually based on location and property values but typically will include the costs to transfer property deeds, titles, land transfers, legal fees, loan fees, etc. On top of this remember that typically the closing itself will usually cost you 2-3% of the home price.
Additional Factors to Home Affordability
Once you purchase a home, taxes and insurance must be paid in order to protect both you and the lender. The main tax that a homeowner will pay is a yearly “Property Tax.” What a property tax does is quantifies the value of your property and home and gives the tax money you pay to the government. Normally, people set up Escrow Accounts that take money from your accounts monthly to go towards your end-of-year property taxes and insurance bills, and then accumulates that money until it is due (so you don’t have to come up with the lump sum all at once, which can be overwhelming). If you own your property outright, some people do choose to pay their yearly property tax outright without an Escrow Account.
Homeowners insurance varies based on many factors including location, and risk factors, but is also something that you are required to pay. This can also be deposited monthly into an Escrow account. The main thing to remember with homeowners insurance is the more risk your property has, the more money you will pay on a policy. Basic homeowner policies usually include (but are not limited to) Dwelling Protection, Personal Property Protection, Natural Disasters, Other Structure Protection, and Injury Liability.
Another insurance you will likely have to pay is mortgage insurance to ensure you will pay your monthly dues. Sometimes Private Mortgage Insurance (PMI) is required if you as a buyer are putting less than 20% down on a house and better protects the lender.
Monthly Mortgage Payment
Monthly mortgage payments will be what you pay every month that goes towards the principal (money you borrowed) and interest on that money. They also sometimes include some of the home’s insurance and taxes. Mortgage payments vary depending on the home, location, money put down on the property, and individual’s credit score. To see an estimated monthly mortgage payment you can click here, but until you meet with a lender, this will just be a projection.
Along with income factors, monthly spending, down payments and closing costs, taxes and insurance, and monthly mortgage payments, there will usually always be random “other” costs included when purchasing a home including homeowners dues, home maintenance, home inspection, etc. When predicting if you are going to be able to afford a house, it is always best to over-price your projected spending. Don’t forget that according to CNN, Total debt payments (credit cards, student loans, car payments, etc.) should be less than 36% of gross income because that has been shown to be a level of debt that most borrowers can pay back comfortably.