You have probably been dreaming about buying your first home for years and now that the time is here, you might have questions about how much house you can actually afford. Speaking to a lender is the most straightforward way to determine the upper limit of your budget, but getting the highest mortgage possible can easily result in one becoming “house poor.” Instead, you should consider all the other factors affecting your monthly budget before deciding on the budget for your new home. These tips are a good starting point when deciding on your home-buying budget.
Home-Buying Budget Tip #1: Keep these common “rules of thumb” in mind.
There are several rules of thumb regarding how much you should or should not spend on your mortgage. One common rule of thumb is that your mortgage payment should be at or under 28% of your gross monthly income, or your pretax income. Following this rule can help to keep you from becoming “house poor.” However, this rule can be difficult to follow in certain major metro areas, so take a close look at your budget and decide how much of your income is truly available for housing related expenses.
If you have other debt, you might not be able to afford the same home as someone with less debt, even if your incomes are similar. A good rule of thumb is that your total monthly debt payments should not exceed 40% of your gross monthly income. This includes payments towards auto loans or student loans, credit card payments, and any other outstanding personal loans. Because of this, it can be a good idea to pay down debt before applying for a home loan.
Another common rule of thumb is your total housing payment should not be more than 32% of your gross monthly income. This number includes your mortgage payment, insurance premiums, property taxes, and homeowners association fees if applicable.
Home-Buying Budget Tip #2: Estimate your maximum mortgage amount.
By working backwards from the 28% rule, you can estimate your maximum mortgage. On the average 30 year mortgage, you will be paying $650 per month for every $100,000 you borrow. This means that on a $200,000 home loan, you will be paying around $1300 each month.
Do not forget to include your down payment in this amount. If you have a $20,000 down payment and you can afford a $200,000 mortgage, this raises your maximum home-buying budget to $220,000.
Home-Buying Budget Tip #3: Speak to a lender.
While having an idea of your budget ahead of time is definitely a good idea, the best way to find out how much house you can afford is to get pre-approved for a home loan. Your lender will take a close look at your finances, including your debt to income ratio and any outstanding loans, and determine the maximum amount that the bank will allow you to spend on a home.
To learn more about the homes that are available in your price range in John’s Creek, Roswell, or Alpharetta, browse the property listings on our website.