You obviously have to have enough money if you hope to buy a home and having a good budget can help you keep your spending on track, allowing you to save up enough to reach your goal. But there is more to home buying than that. The first rule is to never purchase more home than you can afford.
Affordability means more than getting a preapproved mortgage for a certain amount. While many first-time buyers shop according to how much a lender is willing to loan, it’s a must to consider other expenses too. If you don’t, it can set you up for a big financial hardship or even foreclosure. One of the first things you might do for a rough estimate is to use a house payment calculator to determine how much you can afford.
Taking a more in-depth look, this beginner’s guide will give you the basics of mortgage budgeting to set you up right before you fill out that application.
Manually Calculating the Most Accurate Figure
To determine how much you can afford to pay each month on a home loan, you’ll need to calculate your debt-to-income ratio. That means totaling up all monthly expenses and dividing the answer by your gross income. Lenders will look at a prospective borrower’s debt-to-income ratio to determine loan approval.
For example, if you have a gross monthly income of $7,000, a monthly mortgage payment of $2,000, and other expenses totaling $1,000, your monthly financial obligations would be $3,000. That puts your ratio at about 43 percent which is usually the highest figure you can have to qualify among most lenders.
The general rule is that your mortgage payment itself should not be more than 28 percent of your gross income, which is the guideline most lenders follow and includes the principal, interest, taxes, and insurance.
The Down Payment
Lenders typically want a down payment of at least 20 percent of the home’s price in cash. If you don’t have 20 percent, you can still get a mortgage but you’ll have the added expense of private mortgage insurance (PMI) which increases your monthly payment between .5 and 1 percent of the loan amount. The exact amount depends on your credit score, the size of the home, and the potential for it to appreciate, among other factors.
Obviously putting $60,000 down on a $300,000 home is a big chunk of money, so if you don’t have that much, aim for at least 10 percent. Keep in mind that the more you can put down, the smaller your mortgage payment will be each month and the less interest you’ll pay over the life of the loan.
You’ll also have to set aside money for the closing costs which can range between 2 and 5 percent of the purchase price depending on the state. If you buy a $300,000 home that means the closing costs could be anywhere from $6,000 to $15,000 alone.
Your monthly home loan payments aren’t the only consideration when determining your budget. Homeowners have many costs that should be anticipated in addition to that, including maintenance and repairs, utilities, property taxes, and homeowners’ insurance.
The maintenance alone can add up to a hefty sum, especially with an older house. If you have a yard, there will be some work involved or another expense if someone is hired to do the job such as keeping the lawn mowed, leaves raked, and snow shoveled۔