How to Decide How Much You Can Afford for a Home

Are you torn between your dream home and something that will fit your budget? The best thing you can do at this point in the home search process is to take the time to seriously determine your budget and what you can afford for a home.

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It’s easy to get bigger eyes than your wallet can afford, and it’s important to learn now that you have to stay within the budget that you can afford in order to get approved, to afford your monthly payments, and to be able to handle the other expenses that come with homeownership.

In order to determine how much you can afford for a home, you’ll need to find a home affordability calculator that can calculate your family’s personal financial picture. Take a look at what an affordability calculator will need to look at in order to determine what you can afford.

Annual income

The first number you’ll need to determine if your annual income. This would be the combined annual income for anyone on the application, whether it’s just a single borrower or a borrower with their co-borrower. This will include income before taxes and to include commissions, bonuses, tips, and other income like rental income or alimony.

Outgoing expenses each month

Next, you’ll need to know what you spend each month on bills and debts. Between you and your co-borrower, what do you pay each month on your car payment, student loans, child support, and credit cards? Don’t forget recurring payments you make each month such as your utilities, subscriptions, and groceries.

Loan type, term, and interest

Once you’ve determined these numbers, you’ll want to look at the loan type you are seeking, along with the term and interest rate options. There are a variety of loan type options, including fixed-rate loans and adjustable-rate loans. Do you want to pay the same monthly payment each month or do you want the option of an adjustable rate that can give you the opportunity of a lower interest rate at first?

What type of loan term do you want? Do you want a longer-term loan that will give you lower payments at a higher interest rate or do you want to pay it off faster with a lower rate? A lender will help you decide this, but it will affect what you can afford.

Taxes

Income taxes and property taxes will play a factor in your affordability. Your mortgage payment calculator will need to look at your property taxes, as well as your income taxes since income taxes reduce your actual income, and property taxes will add another bill to your annual expenses.

Insurance

The calculator will also need to factor the homeowner's insurance cost that a lender will require of you, as well as your mortgage insurance costs, which is often required of borrowers that put down less than 20% of a down payment.

Down payment

In most cases, a down payment will be needed for a home. The more you can put down, the less you’ll owe on the home and the increased likelihood of getting a more expensive home. The goal is to put down 20% of the home’s price, but you can technically go as low as 3.5% with some lenders. For some, putting a larger down payment down simply allows for a lower mortgage payment each month, rather than as a way to spend more on the home.

Monthly mortgage

The affordability calculator will want to look at what you can spend each month on your mortgage based on what you make, what you already spend, and what other expenses will be required, like your HOA fees or homeowners insurance.

Credit score and financial statements

Don’t forget your credit score and financial statements. Determining what you can afford also requires a look at your credit score and financial statements, which may show that you have a low score and only qualify for a higher interest rate, or financial documents showing that you have assets like stocks or bonds that could help your financial picture.

Be sure to look up a mortgage affordability calculator and have these figures ready to go to find out what your family should be spending on a home.