You’ve decided to buy or build your dream home. You’re understandably excited, but before you get too far into the looking and wishing process, it’s a good idea to take a step back and determine how much home you can afford. Speaking to a mortgage lender about a pre-approval for a mortgage is an excellent step to take toward learning how much home you can afford.
Here’s a secret, though, sometimes, what the bank says you can afford, and what you can actually afford are not the same thing. How do you determine how much home you can afford? Here are a few tips to help you with that.
Factors That Affect the Mortgage
There are some factors that the bank will consider, but others that they won’t even ask you about. To be a responsible buyer, you should consider all the factors.
- Income: Lenders want to know how much they make. However, they look at gross income, which is your income before taxes or other deductions. Realistically, you need to look at your net income or your take-home pay.
- Your debt and expenses: How much do you owe other people? Banks will look at credit cards, car loans, other home loans you might have, personal loans, etc. You should consider all of your expenses like utilities, college savings for your children, your gas for work, and even your food budget. Don’t forget to calculate healthcare, entertainment, your daily coffee on the way to work, or anything else you spend money to purchase routinely.
- Your credit rating: Creditors look at something called a FICO score to help determine your creditworthiness. This gives them a picture of how well you currently pay your debts. It’s a good idea to check your score ahead of time, so you aren’t surprised at the lender’s office.
- Upfront costs: These include your down payment, fees associated with applying for the mortgage, fees for the closing process, the inspections, the appraisal, and any other fees that are associated with the purchase of the home. Don’t forget to account for starting your homeowner’s insurance policy too.
- Your lifestyle and personality: Are you willing to tighten your purse strings and cut back on those trips for coffee? What is your financial comfort zone, and how do you plan to stay in it?
Factors Beyond the Mortgage
Don’t forget there are hidden costs associated with homeownership. Insurance, property taxes, maintenance costs, utility bills, homeowner association fees, and even furnishings for your new place play a role in the expenses you will have beyond your mortgage.
Knowing how much home you can afford doesn’t start or end at the bank. It’s taking a realistic look at your finances now and how they are expected to change when you purchase your home to determine how much money you can spend on the house.
When you’re ready to buy a home, let the experts at The Realty Group Team help you out. We will be there every step of the way!