How Much Home Can I Afford? Realistically
Home Affordability: The Realistic Approach
A bank’s definition of affordable and yours might be different.
Mortgage lenders typically use general guidelines and ratios, such as the debt-to-income ratio, credit score, and down payment percentage to determine your eligibility for a mortgage. These rules provide a basic framework for qualification but may not fully consider your individual financial situation or expenses like daycare, car insurance, phone bills, and more.
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Realistic Mortgage Affordability: Our calculator takes into account your financial circumstances, including your everyday expenses that you will also have in your new home. Those expenses could be childcare costs, groceries, utilities, car insurance, internet or phone bill, entertainment, etc. Taking a more complete look at your financial position seems like the common sense approach the internet is missing. Think about your monthly budget, cash savings needed to make repairs before moving in or furnish the home, and long-term financial goals. Using this approach, you can determine a mortgage amount that aligns with your lifestyle without overextending yourself financially.
Terms to Remember:
- Monthly payment: The amount paid toward the principal (and interest) each month. Stays the same for fixed loans.
- Home Price: The total cost of the home you are considering purchasing.
- Down Payment: How much total cash you have available to give the bank upfront to buy the home. Keep in mind this is different from Closing Cost.
- Loan Term: How long your mortgage lasts, usually 15 or 30 years.
- Interest Rate: The yearly interest rate the bank charges you to lend money for your home. Interest rates affect your monthly payment.
- Property Taxes: The annual taxes you pay on your home. Input your amount or ZIP code for estimates.
- Homeowners Insurance: Coverage for home damage or accidents. This is your yearly premium.
- HOA Fees: Monthly fees paid to a homeowners association, if applicable.
- Private Mortgage Insurance (PMI): Insurance protecting the lender if you can't make mortgage payments. You pay PMI if your down payment is less than 20% of the home price. Costs around $30 to $70 per month per $100,000 borrowed.
Why would a bank use my gross/pre-tax salary when I only take-home the after tax amount?
We asked Tunita Bailey, a Mortgage Broker, why.
Ms. Bailey: “Although it's not the only factor, your pre-tax salary gives us lenders a standardized way to assess income before taxes and deductions. It is a consistent benchmark across all borrowers looking for a mortgage. So it's essential for you to consider your take-home salary when budgeting for your mortgage payments and other expenses, as it reflects your actual disposable income.”
What is a good down payment amount, how much should I save?
Recent homeowners recommend saving an amount that allows you to maintain financial stability after purchasing the home and still have enough left over to cover unexpected expenses.
If you are a first-time homeowner, look for assistance programs or credits you may be eligible for that will help you with your down payment.
Real estate agents may advise clients in this market to go with an amount that will give you the best chance of lowering your monthly payment or interest rate.
Realistic Mortgage Affordability Best Practices:
- Be open to considering homes that are currently listed below your ideal purchase price or in another area that makes more sense for your financial situation.
- Consider factors such as future expenses and potential changes in income when deciding how much home to buy.
- Lenders expect you to have cash reserves available in your bank account after your close on the home. This is a little known fact. So, don’t expect to be able to deplete your savings prior to closing on the home.
- Don’t rush the process! Home Ownership requires discipline and patience.
- Stay encouraged and focus on what you can control.