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“How Much House Can I Afford?”
One of the first questions that a home buyer asks is, “How much house can I afford to buy?” It’s best if this important question is answered from the very beginning of the home buying process. That’s why we refer a home buyer to one of our preferred lenders before we even take them out to look at homes.
Knowing how much you can afford in a monthly payment is very important before you start looking. If you take the time to find out what your loan limits will be, you save yourself from several negative experiences:
- Wasting time, looking in a price range that you won’t be able to afford.
- Building up false expectations. It can be discouraging to paint a picture of your new life in a particular home or neighborhood, and then have it crushed by the reality that your dream is out of reach for now.
- Falling in love with the wrong house. Let’s face it, buying a home is an emotional decision as well as a logical, rational one. It’s best to get all of the rational calculations and plans squared away before you let your emotions kick in to the decision. You do much better when you “fall in love” with a house that you can afford.
The very best ratio, according to most lenders, to have is roughly one-fourth of your income gong towards house payments. Net, or take-home income. Anywhere between 25% and 32% is safe, but it’s good to start with conservative numbers. That way, if you start looking and find that you want to stretch yourself to a number above 25%, you can. If you start looking at the top of your range, you limit your upward movement. [Consult a Lender about “front-end and back-end ratios”…we can refer you to some excellent Frederick Lenders.]
Remember, getting a pre-qualification from a local lender is the only way to know for sure what loan amount you can qualify for. Doing your own calculations is only useful for getting a general estimation.
Learn more about “The Difference Between Pre-Approval and Pre-Qualification” from my fellow real estate blogger, Bill Gassett, Massachusetts Realtor.
Conservative or Not?
With a conservative 25% – 28% of your take-home income going towards your mortgage, you insulate yourself from emergencies. Even with the loss of one income, it is manageable to keep your home.
On the other hand, if you expect to have upward movement in your income, stretching yourself to your maximum loan limit is not necessarily a bad strategy. You may find that going the ultra-conservative route leaves you having to live in less than you really want. Either way, some buyers who make a hasty decision experience what we call Buyer’s Remorse.
For some great advice on “How to Avoid Buyer’s Remorse” read this article by my friend and fellow real estate agent in Las Vegas, Debbie Drummond.
Whether you make a conservative decision or not, having sound financial advice is our strong recommendation, whether through a certified financial adviser, or through the wisdom of friends or family.
*We are not financial advisers and don’t offer financial advice.
Ability Vs. Comfort
Something to consider, what you can afford to pay and what your are comfortable paying are two different things. Some good advice we’ve picked up in our journey: “practice living on the amount that is left after a mortgage payment for a while, to make sure you are comfortable.”
Remember that with a mortgage, you have a tax write off on the interest you pay, and that increases your actual monthly income. Or, you might think of it conversely, it decreases the amount you pay in taxes.
You should know your financial situation before you approach a lender and borrow accordingly. Chart out how high your payments would be at different rates by using our mortgage calculator, or any lender’s mortgage calculator. Once you know what you can afford to pay on the mortgage, you can get a rough estimate about your housing price.
Other Costs of Home Ownership
When you’re asking how much house can I afford to buy, Don’t forget to add in the other costs of home ownership:
- Homeowners insurance
- Average repairs
- HOA Fees
Having proper expectations set before you start your home search can make the process much more enjoyable, more manageable, and it can help keep your emotions in their proper place during the process. For extra reading and great advice:
Mark Brian, real estate agent in Anderson, South Carolina, has some great advice in his article: “Thinking About Buying a Home? Consider This Advice“
Education is Power
At the Highland Group, we prefer to give as much information and education as a buyer or seller can use, before, during and after the process of home buying or selling. An educated consumer makes the best decisions and is a delight to work with. Please don’t hesitate to contact us for your own “personal home buyer’s seminar”…we’re delighted to help.