You’ve been saving for several months and you think you’ve got what it takes to begin the home shopping phase, but you’re hesitant because you’re not even sure how much home you can afford.
This question can be easily answered by utilizing a home affordability calculator. You can find tons of these calculators online! Below I’m going to demonstrate an example so you can see what you need to know and how to prepare yourself to purchase your home.
First, you’ll need to know the following: your annual income, monthly debt obligations, how much you have for your down payment, and what is a comfortable monthly payment for your mortgage. Remember, your monthly debt obligations are the minimum monthly payments for your credit cards, student loans, auto, etc. Also, your monthly mortgage payments should not exceed 30% of your monthly income. This is extremely important to consider because you do not want to stretch your cash too thin by getting a home you can barely afford.
One of my favorite affordability calculators is from Zillow. In this example, we’ve got a home buyer who has $70,000 annual gross income, $700 of monthly debt obligations, and $40,000 for his down payment:
Based on these circumstances, this home buyer can afford a $252,956 home and the monthly payments will be around $1,354. Another thing to point out is that $40,000 of $252,956 is below the 20% down payment lenders would like buyers to meet. In this case, this home buyer has 15.8%, but it doesn’t mean he won’t be able to purchase the home. To solve the gap in his down payment and the 20% benchmark there will be an additional cost to the mortgage and that’s called private mortgage insurance, or PMI.
It’s designed exactly for these circumstances because it protects the lender if the borrower were to default on the mortgage. Paying for PMI isn’t so bad because it may be the only opportunity to get the home as soon as you’d like. There is more to PMIs and here is another post I’ve written about it.
In this image, you can see the additional $78 for the PMI. The estimated homeowner’s insurance and the property taxes are included as well.
There is a whole lot about property taxes and this is one you don’t want to miss. Property taxes can make or break your decision for purchasing a home, as it depends on the zip codes you’re searching in.
Another thing you want to keep in mind is the interest rate on your mortgage. The mortgage payments already include principal and interest, but you should check out how you can get the best interest rate as it has a lot to do with your credit score.
The bottom line is to utilize an affordability calculator to help you prepare and understand your financial position and what you can afford. If you’ve read this post, you need to walk away knowing the following about your finances:
- gross income
- monthly debt obligations
- down payment
- comfortable mortgage payments (no more than 30% of monthly income)
- debt to income ratio
I’d encourage you to check out our home buyer checklist because we cover everything you need to know, including research and additional costs you will possibly incur.