Buying a home is an exciting milestone, but it’s important to understand what you can actually afford. Before you start house hunting and make offers on homes, it’s important to determine the maximum home price you can afford.
The most common way of determining how much home you can afford is to use the 28/36 rule. This rule states that your total monthly housing costs should not exceed 28% of your gross monthly income, and that your total monthly debt payments should not exceed 36% of your gross monthly income. To put this into practice, let’s assume that your annual salary is $50,000 and your total debt payments are $400 per month (this includes car loans, student loans and credit card debt). If we apply the rule to these numbers, we can calculate that your maximum monthly housing costs should be 28% of $50,000 or $1400 per month. Your total debt payments should be no more than 36% of $50,000 or $1800 per month.
In addition to using the 28/36 rule as a guide for determining how much home you can afford, there are several other factors that you’ll need to take into consideration. These factors include:
• Down payment: The larger the down payment you are able to make on a property the more house you will be able to purchase with it. Depending on the lender you use and their requirements they may require a minimum down payment of 3-20%.
• Closing costs: Closing costs are typically 2-5% of the purchase price of a home and will need to be paid at closing in addition to any down payment required by your lender. It is important to factor closing costs into your budget when determining how much home you can afford.
• Mortgage interest rate: Mortgage interest rates vary based on many factors such as credit score and loan type (conventional vs FHA). The lower the interest rate on your loan the lower your monthly mortgage payments will be. It is important to shop around for mortgage rates so that you get the best deal possible.
• Property taxes: Property taxes vary greatly depending on where you live and what type of property taxes are imposed in that area (e.g., real estate taxes). You will want to research property taxes in any areas where you may consider buying a home so that this cost is factored into how much home you can afford.
• Maintenance & repair costs: Owning a home comes with additional expenses such as routine maintenance and repairs which should also be taken into consideration when determining how much home you can afford. These costs may include items such as painting, landscaping, appliance repair/replacement or major structural repairs (e.g., foundation work).
In addition to taking all these factors into account when determining how much home you can afford it is also important to practice smart financial behavior such as paying off high-interest debt before purchasing a home and saving money for emergencies instead of spending it all on furniture or decorations for your new house! Once all these pieces have been put together then we can determine exactly how much house we can comfortably fit within our budget!