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By: Kamiel Moore
Shared by Don Zilleri
Bids By Pros moderator
The reality of life is that many people don’t stop to ask themselves this question when they are beginning the process of buying a house. It can cause for unpleasant surprises when it comes to closing on a house or even further down the road when it gets harder and harder to make mortgage payments. If you are in the process of buying a home, it’s important that you realistically answer this question before you sign on the dotted line. Many people don’t know what exactly determines the answer to this question. That’s where we come in. Here are the questions you need to be asking yourself when trying to determine how much you should spend on a house.
How much of my income do I want to spend on my mortgage?
The answer to this question is very personal. Many financial experts suggest paying 20 to 30% of your income on your home. Take a look at what that number comes out to be. Will you be comfortable with that much missing every month? If not, see what numbers 17 or 18% come out to be. Play around with the amount before you finalize how much your mortgage payment should be.
How much debt do I already have?
Lenders will take a look at this amount to determine if you are a good candidate for a home loan. If you are swimming in student loans or credit card debt, you probably won’t get the best rates or get approved at all. It’s a good idea to pay some of your debt down before you head in to the real estate game. Another good thing to know is your debt to income ratio. This is something that almost all lenders look at. Your monthly debt obligations should not equal more than 36% of your total salary. If you want to determine this number, multiply your income by .36 and divide it by 12. Your monthly debt payments should not exceed this number.
How much can I afford for a down payment?
If you can’t afford to pay at least 20% of your home’s cost as a down payment, it might cost you depending on which lender you choose. If 20% of your home’s total cost seems like an unreasonable amount, you probably can’t afford that home. It’s a good idea to make as large of a payment up front as possible. This will save you in interest rates and allow you to finish paying off your home sooner.
How much do I have in savings?
It’s always good to have some money stashed away for a rainy day. This is particularly important if you have singed on for the responsibility of owning a home. If the worst happens and you lose your current income, how long can you go on paying your mortgage? If you aren’t comfortable with the answer to that question you might want to reconsider signing on for a home.
The best way to determine how much home you can afford is to look at your personal finances and see what your financial situation would look like in several different scenarios. Once you have reached a conclusion and found a number you are comfortable with paying every month you will know how much you can afford to spend on a home. Now, you just hope that your preferred lender agrees with you.
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Kamiel Moore is a real estate investor who works for We Buy Ugly Houses. She has been buying and selling homes across the country for years.
