When buying a home, you’ll first need to figure out how much home you can afford. Home affordability calculators can be helpful tools for understanding your potential monthly mortgage payment, but many don’t account for the human factors like family planning and retirement, or additional costs like taxes and PMI. Consider these six factors to determine what you should spend on your monthly mortgage payment versus what you can technically afford.
1. Consider Your Total Debt
Your debt-to-income ratio is a calculation used by lenders to determine how much of your monthly income is already spoken for in terms of debt. This figure can include student loans, child support, alimony, auto loans, and your minimum balance due on your credit cards. Your ratio of total debts to your gross income should be 40% or below.
2. The 30% Rule
A guideline or rule of thumb that lenders use as a standard is to not allow people to spend more than 30% of their gross income on their mortgage. You may have heard the term “house poor.” This term is used when more than 28% of your income is allocated toward your housing, which includes principal, interest, taxes and insurance (also known as the housing ratio or front-end ratio). So, while you may have a gorgeous home, you likely won’t be able to buy furniture or entertain guests because you’re living paycheck to paycheck once you pay your mortgage and other bills.
3. Consider the Down Payment Cost
Another factor to consider when buying a new home is the cost of your down payment. For those taking advantage of a no money down or low down payment mortgage or special loans for first-time homebuyers, you do not need to put down a hefty down payment. Lower down payments options can add an additional cost of private mortgage insurance (PMI) and increase your monthly mortgage payment, but allow you to buy a home with as little as 3% down. It’s smart to start saving up for your down payment long before you begin house shopping.
4. Understand the Upkeep Costs
When looking at houses, you may get excited by the thought of having your own pool or the big backyard of your dreams. Just remember that these types of items can cost a lot in maintenance over the years. A big yard means you’ll need to manage the upkeep, which may include leaf and snow removal, tree trimming or removal, gardening and landscaping, growing and mowing the lawn. A pool can put you in the deep end quickly with the cost of chemicals and ongoing supplies and maintenance, not to mention the extra liability that requires insurance.
5. Lifestyle Choices
Another way to look at how much home you can afford is to figure out your long-term lifestyle and plan accordingly. Do you hope to have a family and children someday? Do you love to travel or go out on the weekends? How much do you want in retirement savings? Factor in those additional costs and see if you can still swing it while saving for the future. These factors don’t usually make it into a financial calculator or bank’s checklist, so be prepared to consider these elements before creating your monthly housing budget.
6. Emergency Budget Stash
One homeowner tip that is a must is to make sure you save enough money in an emergency fund for unexpected repairs and to leave enough in your monthly budget to continuously save for a rainy day. Hopefully, some of the larger ticket items will be revealed during your home inspection, but with homeownership, it’s always smart to expect the unexpected. At some point, your furnace may break, or your roof could need replacing, and you will be expected to have the money to pay for it. You could put it on a credit card or take out a personal loan, but that will carry interest charges, so it’s smart to have a savings account with at least three months of your income stashed so you can access it when needed.
Ready to figure out how much home you can afford? Use our Rent or Buy Calculator to see if it makes more sense to buy or rent, or try our Mortgage Loan Calculator to get estimates on a monthly mortgage payment.