Figuring Out How Much You Can Afford to Spend on a Home

Trying to find a new home means having to answer a lot of questions. Where do you want to live? Should you rent or own? If you’re planning to buy a home, how much can you afford to spend?

If you’re interested in buying a home, how much you can afford to spend is easily one of the most important questions you’ll have to answer. The answer to this question is going to have an impact on where you can buy a house and how large of a house you can get. But how do you know how much you can afford?

If you’re just starting to consider buying a home, maybe you want to get a general idea of what your price range would be so you can see what’s out there. Genisys Credit Union recommends that your monthly house payments be about 25% of your monthly gross income. That way, you’ll still have plenty of money left each month to handle other important expenses. To calculate this amount, all you have to do is take the amount of money you earn in a year before taxes, divide it by 12, then multiply that amount by 0.25.

When you start getting more serious about buying a home, a great first step is getting pre-qualified by a lender. Getting pre-qualified is a pretty quick and simple process that can even be done over the phone or online. When you get pre-qualified, all you do is supply some very basic information like your monthly income before taxes, your recurring monthly expenses, and how much you can spend on a down payment. Your lender will use that information to figure out a ballpark range of how much you can afford to spend.

Pre-qualification is hardly a thorough analysis of your financial situation, though. As Investopedia points out, pre-qualification doesn’t even consider your credit score or history, which is certainly going to have a big impact on your mortgage options. To get the most accurate idea of what you can afford, you’ll need to visit a lender to get pre-approved. Pre-approval is a much more in-depth look at your finances and a lender will do things like ask to see proof of your income, look up your credit history, and see what your ongoing financial obligations are. Your lender will then pre-approve you for a specific loan amount. Not only does getting pre-approved give you a better idea of how much you can afford to spend, it will help give you leverage when you find a home you want to buy because it will show sellers that you’ve already taken steps to plan for financing.

One very important thing to remember is that there are several other expenses to consider beyond the price of the home itself and what your monthly mortgage payments would be. Don’t forget the cost of homeowners insurance and taxes! Interested in buying a condo? Remember to find out how much the HOA fees are. If you’re making a down payment of less than 20%, you’ll also have to account for the cost of private mortgage insurance (PMI), which can go away once you’ve paid off 20% of your home’s value. And don’t forget to make sure you have enough money left to cover utilities and other maintenance and repair bills. It’s extremely common for home buyers, particularly first-time buyers, to forget about these sorts costs when trying to determine how much to spend on a home and then struggle to come up with the money to cover them later on.

Also, don’t forget to consider whether or not there could be any potential changes to your household income in the foreseeable future. For example, are you and your spouse planning on having children soon? If so, would either you or your spouse be planning to stop working to take care of the kids? Or maybe a significant part of your income comes from overtime pay, bonuses, or working freelance. If this is the case, could you still afford to make your house payments even if you didn’t earn those bonuses, stopped working so much overtime, or didn’t get as much freelance work? These things will make a big difference in whether or not that house you love really is affordable in the long run.

The process of buying a home can be overwhelming and figuring out how much you should spend is one of the first big hurdles you’ll have to get over. Just remember, there are very good reasons why becoming a homeowner is still a big part of the American dream. For millions of people, owning a home is one of the most rewarding things they ever do.