Happy Home Hunting!
by Jon Flaherty
Are you in the market for a new home? If so, you may be wondering how much house you can afford. The general rule is that you should spend no more than 28% of your gross income on your housing cost. Although this doesn’t work for everyone, it is a good starting point in determining a comfortable amount.
If you have any current debt such as a car loan, student loan or credit card debt, you should factor that into your decision as well. The general rule of thumb is to spend no more than 36% of your gross income on housing and debt costs combined. As these are general rules, I’d encourage you to look at your overall cash flow and review any goals you may be working towards to get a sense of whether you’re currently on track.
In reviewing your cash flow, you should have a good handle on current rent or mortgage payments. As an alternative to the general rules of thumb listed above, consider using your current spending as a baseline for moving forward. At your current housing expense level, are you on track to meet your goals? If so, do you have a surplus on your cash flow each year? If you answered yes, then you may have leeway to increase your current spending. On the other hand, if you feel like you are always behind or living paycheck to paycheck, then this might be a good opportunity to dial back your spending on your housing to a level that will make your month to month cash flow easier to manage.
Now that we have a general sense of how much you can afford on a monthly basis, you’ll want to consider how that will translate to buying a new home. Your monthly housing expense should cover principle and interest payments, real estate tax and homeowner’s insurance costs. If you are in the market for a condo or townhome, you could also have Home Owner Association (HOA) fees to pay each month that cover upkeep on shared spaces, yard work, etc. Depending on how much you have available for a down payment, you could also be subject to Private Mortgage Insurance (PMI). PMI is typically charged when a home is bought without putting down at least 20% of the home value, although you may have some room for negotiation.
The final piece to the puzzle is how much you’ve saved for a down payment. The savings could be equity in a current home or part of funds that have been set aside specifically for a new home purchase. Beside the down payment, you’ll want to have funds reserved for projects, refurnishing the new place and any additional closing costs. Your down payment and monthly spending budget should help determine how much home you can afford based on current mortgage rates.
If you are in the market for a new home and are searching online listings, keep an eye on what the monthly fee includes on each website. Some will only list the principle and interest payments while others try to be more inclusive. Be sure you know what’s included, and if something is missing, do your research to find a good estimate. If you are working with a real estate agent, let them know your down payment savings and target for monthly expenses. Even if you are approved for a higher mortgage, stick to what will work for your specific situation and you’ll be less likely to have buyer’s remorse. Happy home hunting!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. All data and information is gathered from accurate sources but is not warranted to be correct, complete or accurate.