If you’re in the market for a new home, then you’ve probably already asked the question: how much house can I afford? With a little research, a few free online tools, and some common sense numbers crunching, figuring out what you can afford can be surprisingly painless. Here are our tips for determining a home-buying budget.
Run the Numbers
Truth be told, A LOT of numbers need crunching. Luckily, many real estate, banking, and lending websites offer free home-buying calculators that crunch the numbers for you. They typically account for all monthly payments associated with owning a home: the mortgage, property taxes, mortgage interest, homeowners association fees (if any), and homeowners insurance. All you need to know is your total monthly income and how much you currently spend each month.
To calculate your total monthly income, consider things like:
To calculate your total monthly expenses, consider things like
- Car payment
- Student loan debt
- Credit card payment
- Other debts
Increase your down payment (if you can)
The down payment is what you pay once you’ve committed to a property. It could be anywhere from 0%-20% of the home’s price, and sometimes even more than that. How much you put down is up to you. But the more money you put down, the more skin you have in the game. And the more skin you have in the game, the lower your monthly mortgage payments will be. It also means your lender won’t require private mortgage insurance (PMI) — which typically adds 1% of the total loan value to your monthly payment.
Know your debt-to-income ratio
Your debt-to-income ratio or DTI is just a way of saying how much you make and how much you pay. To come up with your DTI, divide your monthly expenses by your monthly income. Most experts agree that the sweet spot you want to be in for DTI is somewhere between 28-36%. That way, you’re not emptying your bank account each month.
Set your budget
Your DTI should give you a good sense of your budget baseline, but you should take into consideration other short and long-term goals as part of your overall budgeting process, making adjustments accordingly. Questions to think about:
- Do you need to set aside money for home improvements?
- What are your short and long-term savings goals (special vacations, retirement)?
- Do you want extra money left over for yourself?
- Do you have an emergency fund?
Work with a Realtor You Can Trust
Though you can do much of the home affordability research yourself, try finding a real estate agent you can trust to get more insights into the housing market. An experienced realtor can help you navigate the specifics of your local market. They can show you homes that meet your needs and are within your price range.
Also, before you can close on a house, your lender will very likely require home insurance. So start an Esurance homeowners quote today — you’ll be a homeowner before you know it!