Home buying can seem like a daunting process when you first look at the numbers. A half a million dollar property here, a quarter million dollar townhouse there, thirty-year terms here, ten-year terms there. With such large numbers, lengthy loan terms and broad questions like 'how much house can I afford' the process can be confusing.
Home buying can also be an emotional process, too. Suddenly, you may find yourself looking at properties way out of your actual budget. Several homes may be tugging at your heart strings. It can be easy to lose your footing in reality.
Thankfully, all it takes is just one simple question to regain clarity and perspective.
"Monthly, how much can home can I afford?"
Notice I emphasized the word monthly.
That's because your monthly finances will allow you to get a clearer picture of your true debt to income ratio, and, in turn, how much of your budget you can put towards housing.
Besides, it's much easier to grasp all those numbers when they're concentrated within a thirty day window compared to, say, a thirty year--or 10,950 day--window. Your mortgage payment will likely be due every month, too. So this give you a realistic perspective.
Here's where to start.
- Figure out your monthly gross income. Calculate it by adding your paycheck, investment income, business or side job and then subtracting your recurring debts and expenses--utility bills, groceries and the like.
- Then, subtract additional funds for savings and retirement, and you should be left with your highest possible housing budget. How much of that you put towards housing is up to you.
Popular mortgage guidelines advise that your monthly housing costs shouldn't exceed 28 percent of your total monthly income (and debts shouldn't exceed 36 percent of that total income), but again, these aren't requirements--just recommendations.
These numbers will keep you focused on the facts while also providing a strong starting point. From there, once you know your actual budget, you can seek out other ways to mitigate costs like down payment assistance programs and other resources (Growella, a financial education website, is a great place to find additional programs).
Here's how I approached my first home purchase:
When I purchased my first home, it was substantially below that 28 percent marker because I wanted something I could afford with absolute confidence. Even if I lost half my income overnight, I still wanted to be able afford my house.
You'll want to factor in your goals, too.
For me, I didn't want my first home to be my last. I wanted it to be an income-producing property one day. I also wanted to keep some cash in the bank for investments down the line. This led me to seek out very affordable properties.
Because of the overall affordability, I didn't have to put down a large down payment to offset the monthly cost. This allowed me to invest down the line as I had planned.
It's easy to get lost looking at big numbers.
Instead, boil things down to a simple monthly budget and a list of key goals. How much do you make? How much do you spend? What do you want to do with what's leftover? More often than not that final number will dictate your next best steps.