Searching for a new home can be fun — But it’s easy to get caught up in all of the excitement. Finding the perfect house on a budget can be challenging, so it’s much better to understand your budget before you start your search. Knowing how much house you can afford can ensure that you don’t set yourself up for disappointment in your search. House prices fluctuate, but finding an affordable house is easy if you know what you’re working with.
If you’re looking for a new home and have been wondering about house prices, here are some tips to help you find a home within your budget.
What Is Your Monthly Take-Home Income?
Working out how much house you can afford is fairly straightforward. It’s essential to do this before you start your home search to avoid any costly mistakes. Here are some steps to help you calculate.
Step 1: Find your monthly income.
Combine your and your spouse’s total monthly income. For instance, if you bring home $2500 a month, and your spouse brings home $3000, your combined total monthly income is $5500.
Step 2: Calculate your mortgage payment.
To work out your maximum mortgage payment, you need to multiple your monthly income by 0.25, or 25%. For example, on a monthly income of $5500, your monthly house payment should not exceed $1,375.
Step 3: Use an online mortgage calculator to help determine your ideal range of house prices. An online mortgage calculator will give you your maximum sales price, so you know how much you can afford.
How Much Down Payment Will You Need?
If you’re able to save a larger downpayment, you’ll need to finance the less home. This not only means lower mortgage payments, but it also makes paying your home off a lot faster process. Of course, the best way to purchase a home is all cash, but if this isn’t an option, financing the least amount possible is preferential.
Having a 20% downpayment means you won’t have to pay private mortgage insurance (PMI). PMI is a safeguard for your lender if you don’t make your monthly payments and foreclose on the home. PMI typically costs 1% of the total loan amount, which can increase your monthly payment substantially if you’re on a tight budget.
Budget for Closing Costs
Many buyers forget about closing costs when calculating their new home purchase. Typically, closing costs are between 3% and 6% of the sales price of your home. Closing costs include things such as your appraisal fees, credit report, title fees, HOA (if applicable), and home insurance.
For example, if you purchase a $250,000 home, your estimated closing costs will be around $7500 to $15,000.
Other Homeownership Costs To Consider
Homeownership has a lot of perks, but it also comes with increased responsibilities and costs. When searching for a new home, you should also factor into your budget; utility costs, appliances, repairs, and routine services such as HVAC.
Before you seriously start your home search, it’s crucial that you get prequalified with your lender. Prequalification gives you an accurate idea of how much house you can afford, so you’re not disappointed. Prequalification also makes you more competitive, especially in a seller’s market. This is because it shows the seller that you’re ready to go and have already started on your financing.
The prequalification process is relatively simple and requires some information about your income. Some lenders offer a more in-depth prequalification process called a preapproval, in which you send them supporting financial documents in return for a more comprehensive preapproval. If possible, you should aim to secure this preapproval type, as it will streamline your lending process once you find your dream home.