How Much House Can I Afford: From a Financial Advisor

Becoming a homeowner can be an exciting step. It means having a place to call your own. You have the potential to build equity over time and lay the groundwork for your future.

Before starting the homebuying process, it’s important to see if this is the right financial and personal choice for you. Once you’re confident about taking the plunge, you should consider how much house fits your budget and lifestyle.

Step 1: Estimate Your Homebuying Budget

A good starting point may be to assess your financial situation and determine a price range that makes sense for your income level. A common rule of thumb suggests that your home’s price should fall between three to five times your annual household income.

However, several factors influence where you should land within that range, including:

●      Current debt levels – Your debt-to-income (DTI) ratio can play a major role in how much mortgage you can afford. Many lenders prefer to see a DTI ratio below 42%, though a more conservative target is 36%.

●      Mortgage rates – Higher interest rates mean higher monthly payments. For example, a $400,000 mortgage at 3% interest may cost around $1,700 per month, whereas at 8%, that may jump to nearly $3,000.

●      Earning potential – If you anticipate significant salary increases in the future, stretching your budget slightly may be reasonable. But if your income is stable, it’s wise to ensure your mortgage is affordable based on your current earnings.

Step 2: Save for Your Down Payment and Upfront Costs

Before you start house hunting, think about saving an amount equal to your yearly income. This may help cover your down payment and closing costs. Ideally, a 20% down payment allows you to avoid private mortgage insurance (PMI), which may save you money in the long run.

If 20% down is not possible, you can consider FHA loans or other nonconforming loans. These options may help you buy a home with a smaller initial payment. However, lower down payments often come with higher monthly costs, so weigh the trade-offs carefully.

Step 3: Get Preapproved for a Mortgage

Budgeting guidelines can give you a good estimate. However, your real borrowing power depends on your credit score, debts, and financial history. Getting preapproved by multiple lenders may help you find the best rates and loan terms.

To prepare:

●      Check your credit score and review your credit report for errors.

●      Reduce outstanding debt to potentially improve your debt-to-income ratio.

●      Submit mortgage applications within a short timeframe (typically 1-2 weeks) to potentially minimize credit score impact.

Step 4: Refine Your Budget and Priorities

Once preapproved, fine-tune your price range based on realistic affordability. Just because a lender approves you for a certain amount doesn’t mean you should borrow the maximum.

When considering a home’s affordability, don’t just focus on the mortgage—factor in:

●      Property taxes

●      Homeowners insurance

●      HOA or condo fees

●      Utilities and maintenance (a general rule is to set aside 0.5% of the home’s value annually for upkeep)

Looking at homes in different price ranges may help you see what you will pay each month. This way, you may be able to avoid going over your budget.

Bottom Line

Buying a home is a significant financial commitment, but careful planning may make the process smoother and less stressful. By setting a realistic budget, saving for upfront costs, and securing the right mortgage, you’ll have the potential to be well-positioned to make a confident and informed decision when the right home comes along.

Sources:

https://www.fidelity.com/viewpoints/personal-finance/before-buying-house

Disclosures:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

This material is provided as a courtesy and for educational purposes only.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.