How much home can you afford?
Home prices throughout the Houston market are at all-time highs, which is raising concerns about affordability, especially among first-time home buyers. Then layer on rising interest rates, and many consumers are having to carefully weigh whether the “American dream” is attainable right now.
A key step to finding a home is figuring out how much you can spend.
Some people think that that decision begins and ends with the down payment and the monthly mortgage payment. But these are just two factors to consider when deciding if you can afford a home. Homeowner’s insurance, property taxes, and maintenance and repair expenditures are a few others to consider when budgeting for a home.
Create a budget
In order to know how much home you can afford, you might consider creating a household budget. Of course, a lender will want to know your current income as well as what you might expect to make during the term of the loan. Do you owe money on your credit cards? Are you still paying off college loans? How much do you spend monthly on basic living expenses? Do you have sufficient reserves to cover homeowner’s insurance, property taxes, and any maintenance issues that might come up? What, if any, are your assets?
While the answers to many of these questions can be found in your credit report, it helps if you really understand what you are getting into. Sit down and create a budget. The lender may choose to lend you more than your budget tells you is the limit. But just because the bank will loan it to you doesn’t mean it fits your plans. Maybe you’re thinking about having a big family or really want a new car every two years. These are important things to consider when developing your budget.
There are many tools out there to help you. Look for online mortgage calculators that include homeowner’s insurance, property taxes, monthly debt, and more. Try your hand at one of these, but be sure to include any monthly payouts the online tool fails to mention. Your Realtor can also help you consider what you can afford. They can also discuss financing options with you.
Lender’s needs
The lender will want to know how much you plan to put down. Traditionally, a down payment of 20% of the value of the home was required. Today, it’s much different. In Texas, there are a variety of down payment-assistance programs as well as programs to cover closing costs. Be sure to ask your Realtor for information about these.
When you have that down payment in place, the lender will then plug your income numbers into two formulas: front-end ratio and back-end ratio. The front-end ratio is your prospective monthly mortgage payments divided by your gross monthly income. This comes out to a percentage, and a lender uses this percentage to get an idea of how much of your income will go toward paying your loan.
The back-end ratio is the amount you pay in monthly debt, including school loans and credit cards. This tells the lender how much money you have remaining each month to pay the loan back. Typically, lenders follow a rule of thumb when qualifying consumers for home loans, but these “rules” aren’t as stringent as they were in the past. The guidelines also vary from lender to lender. Therefore, it is up to you to know just how much you can afford.
Renting vs. owning
Do not to let rising interest rates deter you from buying a home. While there are many costs to consider, there are also tax advantages that make purchasing a home more affordable than you might think. The interest on rent is 100%. If you are currently renting, the idea of paying loan origination costs, Texas-sized property taxes, homeowners insurance, and upkeep and repairs may seem overwhelming. But did you know that you may be able to deduct from your federal income tax your mortgage interest and property taxes?
Not only do tax perks help, but owning a home is an investment in your future. As you make monthly mortgage payments over the course of the loan, you will gradually own more and more of the house. Not only does your equity increase, but private property historically appreciates over time. That’s an excellent rate of return on investment. And unlike renting, once that loan term is fulfilled, you no longer have to pay a monthly mortgage. Most people will agree that owning real estate is a good way to build wealth.
The benefits
While there are many plusses to owning a home, it is important that you know how much home you can afford before taking that big step. Some consumers fail to budget accurately and find themselves struggling with a mortgage payment that crimps their lifestyle. With assistance from your Realtor, you can figure out an amount that’s appropriate for you, your bank account, and your lifestyle. Be sure to rely on HAR.com to find a Realtor and the home you’re looking for.