Can I Really Afford that Home? What You Need to Know
A house is one of the biggest purchases that you will likely make in your entire life. This is why it is absolutely necessary to find the right house for you not only in terms of specifications, but also in budget. Purchasing a home isn’t as easy as swiping your credit card or signing a few papers. You have to understand the factors at play such as your monthly income, your expenses, your credit score, the down payment terms, current interest rates and available financing schemes. With so many elements involved, it can get confusing to know just exactly how much home can you really afford.
How Much Home Can You Afford?
Why should you know this ahead of time? Home buyers, especially first time buyers, can waste so much time looking at houses that are too expensive. On the other side of the spectrum, some buyers also limit themselves for fear of finding something that is potentially unaffordable.
Calculating how much you can afford to pay and how likely it is that you will be approved for a loan can give you an idea of your upper limit in terms of monthly payments. As complicated as it may sound, a quick rule of thumb is: multiply your annual household income by three. This gives you a figure close to the price of the home you can afford. For those who have minimal debt payments and have the ability to pay a 20% down payment, increase the multiplier to 4 instead of 3.
For example, if you and your spouse make a total of $70,000 per year, then you can most likely afford a home that costs $210,000. If you have saved enough for a 20% down payment, then you may be able to afford a house around the $280,000 price range.
Should You Buy or Rent?
Many home buyers are faced with the question of whether they should take the leap of buying a house or if they should stick to renting. Both options offer different advantages and disadvantages. You want to determine which option is more affordable and makes more sense for you.
Advantages of Buying a Home
- Property amasses equity
- Sense of security
- No landlord
- Free to change design and landscaping
- Ability to sell for a bigger amount in the future
Considerations of Buying a Home
- Maintenance Cost
- Payment of property taxes
- Possibility of foreclosure
- Little avenue for mobility
Advantages of Renting
- Little responsibility in terms of maintenance
- No additional payment of real property tax
- Better mobility
Considerations of Renting
- No equity build up
- Inability to control rental rate increases and spikes
- Possibility of eviction
- No tax benefits
Depending on your priorities, buying a home and renting can have different advantages that might suit your needs better. However, in terms of finances, purchasing a home makes better sense since the monthly cost of rent is most of the time close to or comparable to the monthly amortization. Tax advantages of purchasing a home also brings the monthly payments lower, making it less costly than paying rent.
Home Economics and Your Credit Score
Knowing your credit score is an important component of determining how much you can afford. Your credit score directly affects the interest rate your mortgage will likely have. The higher the interest rate, the larger the amount you will have to pay every month on your housing loan.
The three credit reporting agencies where you can request a copy of your credit score are Experian, Equifax and Transunion. Most likely the banks will use the middle score in your application since these three agencies will give different numbers.
Credit scores range from 340 to 850, and the higher your score is, the lower the interest rates and the bigger range of financing options are open to you. Banks use your credit score as a way to track your credibility as a borrower.
The factors that will affect your credit score are as follows:
- 10% – Types of Credit Used
- 10% – New Credit
- 15% – Length of your credit history
- 30% – Amount you owe
- 35% – Payment History
Local Home Buying Programs
Every state has its own home buying program that helps buyers acquire the house of their dreams. These can include housing counseling agencies, seminars on predatory lending, assistance programs, home ownership vouchers, assistance in home repairs, foreclosure avoidance and making the home more energy efficient. These programs vary from state to state so it’s best to check with your local government to see what’s available in your area and how these programs can benefit you in your quest to purchase a new house.
Buying a home cannot be done in a whim. It takes careful planning and research to get a mortgage that fits your family’s needs and budget. Before closing that sale be sure to double check what you can really afford and the financing options that are available to you.
Are you trying to determine whether you can afford to buy a house? Tell us about your experience.