Buying a House
Buying your dream home maybe is what you always wanted. But amidst all the excitement and eagerness, don’t forget that buying a home can be one of the most crucial decisions you can make! Home is the biggest financial decision one can make and will remain your precious asset. It is an important decision and needs to be taken ahead with proper planning. This is why setting out a home-budget plan is necessary. But how does one start?
We can provide you some helpful tips regarding how much house you can actually afford. So, before you jump right into purchasing a home for yourself, here are the steps you need to take to determine exactly what you can afford to pay for your new home.
Information to gather
To calculate how much house you can afford, we take into account a few primary items, such as your household income, monthly debts (for example, car loan and student loan payments), and the amount of available savings for a down payment. As a home buyer, you’ll want to have a certain level of comfort in understanding your monthly mortgage payments.
While your household income and regular monthly debts may be relatively stable, unexpected expenses and unplanned spending can impact your savings. A good affordability rule of thumb is to have three months of payments, including your housing payment and other monthly debts, in reserve. This will allow you to cover your mortgage payment in case of some unexpected event. There are many web calculators available that give you the information you need.
Some important information that you should have collected to determine how much house you can afford includes:
- Your current salary and also proof of your earnings for the past two years via W2s and/or tax returns
- Your overall income, including the specific components (bonuses, commissions, and more)
- Your credit score, along with the types and amounts of your other debts, and any other information on bankruptcies, liens, and judgments, too
- The size of your down payment and your bank and asset statements (particularly if the funds you’ll use appeared suddenly or only recently in your account)
- Sensitive information, like alimony or child support payments (and legal documents to prove they exist)]
Factors to Consider
There are other costs beyond just your mortgage payment that you should factor into how much you can afford to pay on a monthly basis. These factors include the down payment that you have saved up to pay on your home, home insurance, private mortgage insurance if you’re putting less than 20% down and any closing costs. Include these costs in your overall determination on how much house you can really afford so there are no surprises down the line.
Stay Within Your Budget
Try sticking to the 28/36 rule. This is a tried and tested method and advised by many financial advisors. This rule is effective in understanding if you can afford a house or not. According to this rule, you should not spend more than 28% of your monthly income on housing expenses and 38% on your total debt. This acts as a baseline to your budget and expenditure.
It is always smart to spend or invest less that you own. In this way, you won’t risk getting into trouble. Let’s say you can afford something for Rs. 50,000 but, aiming low and investing only Rs. 40,000, is better if you want to ward financial risks. Most of the time, people spend all they have to buy a beautiful home but end up spending many years of their life not happily living in it. They won’t have money left to repair, furnish, or even maintain it.
Buying a home is a long-term investment. Tread carefully. Do your research before getting influenced by any real-estate broker that might sell you off a bad deal. This is where financial literacy pays off. Know what you want and what you’re looking for. Make sure not to overspend all your money on this. Keep an emergency fund and savings aside. Think long term when investing in a house.
When you’re ready to start home shopping, rather than rely on a mortgage affordability calculator, consider obtaining a loan pre-approval with a qualified lender such as Galaxy Lending Group. A pre-approval letter can provide a more accurate idea of the maximum loan amount you can borrow. And, because you may need to submit financial documentation before receiving a letter, you’ll have a more realistic idea of if you’ll be approved for a mortgage down the road.
But basic pre-approvals are still not a full guarantee. That’s why it pays to consider a fully verified pre-approval, which goes a step further to confirm your financial documents, giving you complete confidence in exactly how much you can afford. Verified pre-approval is particularly important if your income or situation is not straightforward, such as if you’re self-employed. Bringing a pre-approval letter to accompany your offer will make you a much more attractive buyer in a competitive housing market.
Are you ready to get started on the pre-approval process? Or just have more questions about what all goes into figuring out how much home you can afford? Speak with the Loan Experts at Galaxy Lending Group today to get all your questions answered.