When you start to think about buying your first home and what it involves, one of the most important aspects is to ensure it’s one that you can afford. Figuring out what to spend isn’t just about the sale price of the property itself but how much cash you have available for a down payment, the money you’ll need for closing costs, and all of your monthly expenses.
You can get a basic idea of what you can afford by using a house payment calculator. But you’ll also want to consider other factors that will help pinpoint the amount that you can comfortably afford for your housing costs each month.
The Home Price
By now you’ve probably used multiple online calculators to determine what you can afford based on your annual income. These are very helpful tools, but you can also follow the rule of thumb that calls for multiplying your yearly income by three and four to come up with a range of what you can realistically qualify for. For example, if you make $120,000 annually, you would probably qualify for a home that ranges from $360,000 to $480,000.
Of course, that exact range will vary based on the down payment you’re planning to make and the type of loan. A down payment that’s under 20 percent might mean you’ll be approved for a lesser amount. One that’s larger means you might be able to buy a home that’s a bit above that range.
Most experts advise that your monthly housing costs be no more than 30 percent of your net income, or take home pay. As CNBC reports, it’s a standard that the government has been using for 40 years, considering those who spend over that amount to be “cost burdened.” That means if your monthly housing costs, including the mortgage payment, insurance premiums, taxes, maintenance and any other related expenses is over 30 percent, you’ll likely struggle to make monthly payments on time.
Don’t Stretch Yourself Too Thin
When you’re touring the homes searching for that perfect first house, it can be easy to fall in love with that hot tub in a beautifully landscaped backyard or a spacious chef’s kitchen, but is it what you really need? Those features can be very appealing but enjoying those could mean sacrificing dinners out, the occasional weekend trip, and many other things you usually enjoy. It might make more sense to choose the less expensive home that might require a little aesthetic fixing up like a new coat of paint.
Keep All of Your Expenses in Mind
While your housing costs will be a big part of your budget, take all expenses into account, including the possibility of some that are unexpected. For example, maybe you drive an older car that could have mechanical problems in the near future and need replacing? The 30 percent figure provides a place to start but it’s always a good idea to have a little breathing room in case a life event makes it more difficult to make that monthly mortgage payment.