Real Estate Math: How Much Home Can I Afford?
As a buyer, one of the biggest hurdles you'll be faced with is deciding how much you can spend. On the one hand, you'll definitely want to make sure that you purchase a home that suits your needs, but on the other, you don't want to be left feeling "house poor" either. Luckily, with a few simple equations, you can set a budget that works. I've laid homebuying's major costs out for you below. Keep reading to learn how much home you can afford to buy.
1. Find your monthly payment
Add up your income
Start this process by adding up all your sources of income for the month. Any reoccurring payments count, such as your main paycheck and supplemental sources of income like those from a second job or support payments. However, one-time sources of income should not be counted.
Multiply it by 0.25 and 0.36
Conventional wisdom states that your monthly housing payment should account for between 25% to 36% of your monthly take-home pay, including supplemental costs like taxes and insurance. To find out what your monthly payment would be at each of those percentages, simply multiply your total monthly income by 0.25. Then, multiply it again, this time by 0.36.
Decide on a monthly payment that works for you
Your next step is to find a monthly payment that you feel comfortable paying. Use the two numbers from the step above as a range to get you started. Take the time to put each one into your current monthly budget in place of your current housing costs. See how each amount feels when combined with the rest of your current expenses. Then, tweak the number until you find a monthly payment amount that feels right.
Use a mortgage calculator to determine your maximum sale price
Once you have that number in hand, take a look at a mortgage calculator. Be sure to use one that allows you to work backward and input your total monthly income in order to determine the maximum amount of money you'll be able to borrow at that monthly payment.
2. Determine your downpayment
Budgeting to buy a home isn't just about how much you can afford to put towards your mortgage payment each month. There's also your downpayment to consider. Usually, this payment is expressed as a certain percentage of the loan's overall value. It's the portion of the home's sale price that you pay upfront, usually from your savings or gift money, while the rest of the cost is covered by your mortgage.
While conventional wisdom states that you should be prepared to put 20% down on a home, today's buyers will be happy to know that's no longer necessary. These days it's more common to see down payments that range from 3% to 5% of the home's purchase price. Though, if your credit score is lower, you may have to bring closer to 10% to the table in order to be approved for the loan.
The downpayment that you need will depend on the size of the loan program that you choose. However, until you're ready to apply for a loan, you can estimate the amount you'll need by multiplying your budgeted sale price, first by 0.03 and then by 0.05. If you don't have that much cash on hand right now, make it a goal to start saving toward those amounts.
3. Don't forget closing costs
In addition to your downpayment, closing costs also need to be paid at the time of settlement. Closing costs account for any fees that were garnered in closing on the home. They usually include things like your inspection fees, title search fees, and loan origination fees. Typically, they'll amount to 1%-2% of the home's purchase price, which is then split between the buyer and the seller.
Again, you can find out how much you'll need for closing costs by multiplying your budgeted sale price by 0.01% Ideally, you'll be able to save up that amount in addition to your downpayment. However, if that's impossible, you can always ask for the seller to cover your portion of the closing costs when you write up your offer. In this scenario, the seller will pay for all of the closing costs upfront and your portion of the payment will be rolled into your mortgage.