How to Calculate How Much to Spend on a House
Buying a house is not only a financial but also an emotional process. Problems arise when buyers fall in love with a house but cannot afford it. Insurance, property taxes and utilities must all be taken into consideration before signing contracts because sometimes buyers become blinded by love and overextend themselves. Avoid this common pitfall by determining how much to spend on a home before you go shopping. Consider factors like your income, assets, liabilities and property taxes to determine what you and your family can comfortably afford.
Other People Are Reading
Instructions
-
-
1
Create a list of your monthly expenses and overall assets. Include what you are paying on your current mortgage as well as how much equity you have in your home or your rent payment; utilities, taxes and insurance; debts such as credit cards and auto loans; and miscellaneous expenses such as groceries, childcare, gas and clothing.
Your asset list should include the amount of principal you have in your current home, savings along with CDs, money markets and investments.
Compare this list to your household gross monthly income. Seeing a comparative list on paper will show you where your money goes every month and give you an idea of how much house you can afford.
-
2
Obtain tax and insurance rates. Contact your local property appraiser and an insurance agent to get an idea of how rates are determined and calculated. It's impossible to know how much house you can afford without having these important figures. For example, some state property taxes are 2 percent of the sale price, which can add a considerable chunk of money to your monthly payments. Some areas of the country have a higher rate on flood or wind insurance than in other parts of the country.
If you are looking in a specific area and know that the neighborhood has homeowners fees, ask the association for a fee schedule so you can add that amount into your monthly calculation.
-
-
3
Apply the 20/28/36 rule to calculate how much house you can comfortably afford. Use your asset and liability list as your guide.
The "20" rule is that you aim for a 20 percent down payment. Twenty percent is considered to be industry-standard to obtain a regular mortgage product. You can make a lower down payment; however, it will be reflected with a higher rate and terms.
The "28" rule is your total house payment. Your monthly house payment should not exceed 28 percent of your gross monthly income. This includes the mortgage payment, homeowner dues, property taxes and insurance.
The last section of the rule, "36," refers to the whole enchilada. All monthly expenses, including house payments, credit cards, car loans and tuition, should not exceed more than 36 percent of your gross monthly income. Allocating a higher amount of money for the house only squeezes you tighter, making surprise expenses impossible to pay.
-
4
Get preapproved for a loan if you aren't paying cash for your home. Your rate will influence how much you end up spending on a house. Complete a quick preapproval application from your financial institution to determine the mortgage rate and terms. Being preapproved puts you in a positive light with sellers and moves the home-buying process along quicker when you find your house.
-
5
Go house hunting. The best way to avoid falling in love with a home you can't afford is going into the hunt with a realistic price range in hand.
-
1
Tips & Warnings
Always go through a lender with solid lending practices. If the loan officer doesn't request common documentation such as a credit report or income pay stubs, find another lender.
When calculating your income, don't include a possible raise or salary increase. Use only current numbers--you can't predict the future.
Ask for advice. If you currently work with an investment manager, present your figures and ask for her opinion. If this is your first home, talk to your lender and possibly your parents to get a second opinion about your monthly figures.
References
- Photo Credit house image by kruszek from Fotolia.com
