Owning a home is one of the American Dreams. The investment is more than a financial decision, but also an investment towards your future. As you begin the search for your next home, you have probably been asking “How much can I afford?” It’s a typical question many home buyers have and it’s often a calculation they incorrectly gauge. To help you figure out how much you can afford, we’ve compiled a few points to consider when buying a home:
1. Your Income
One factor that determines home affordability is your gross annual income. Obviously, the more money you earn, the more you can afford. To get a basic idea of how much you can afford when buying a house, you can multiple your income by 2.5. For example, if you make about $60,000 annually before taxes, you can typically afford a home around the $150,000 price range. However, you should note this calculation doesn’t include other expenses like mortgage rates.
2. Your Housing Ratio
No matter how much money you make, it is not wise to put your entire paycheck towards your housing expenses. Most experts recommend that you spend around 30 percent of your income on housing costs at most. This includes not only your mortgage, but also your interest, insurance, and taxes. Divide your annual income by twelve and multiply by .30 to figure out how large of a monthly payment you can afford.
3. Your Debt-to-Income Ratio
If a large portion of your paycheck is needed to pay down other debts, you will have less money left over for a house. Most experts recommend that your debt-to-income ratio should be no higher than 30 to 40 percent of your gross monthly income. By creating this buffer in your budget, it allows you to continually save and use money for other expenses in your life. The last thing any lender wants is for you to be financially strapped for cash, and when you hit a life emergency, default on your loan.
4. Your Down Payment Amount
Down payments play a minor part in determining how much you can afford when buying a house. The higher down payment you put down, the less you will owe on the house typically makes lenders give you a lower interest rate on the loan. Usually, the normal down payment a lender is looking for is around 20% of the home’s price. You can put down less, but the lender might ask to to pay for mortgage insurance to cover the possibility of you defaulting on a loan with no equity yet. As the mortgage monthly payment lowers (from the down payment amount), the more you can afford.
Buying a Home in East County, San Diego
When buying a home, you should also factor in your lifestyle. Do you tend to buy the latest in tech gadgets, such as new Apple products? Do you routinely change cars? Other debt can impact your ability to afford a home. Before you begin searching for a home, we suggest you talk with a lender and get pre-approved for a loan. That way, you know which price range of homes you should be looking at.