In a perfect world, you would not spend more than 28% of your gross monthly income on your housing payment. Just what does that mean and how much money do you need to actually buy the home? We help you understand the calculations below.
Stick With What You Can Afford
First, we start you off with a tip. When a lender prequalifies you for a loan, chances are they give you the maximum loan amount you can qualify to receive. This doesn’t mean you can afford that amount. It’s what the lender has figured out by looking on paper.
What we recommend is that you stick with what you know you can afford. Take the numbers the lender gives you and put them into action. Pop those numbers into your budget and see how they fit. Do you have enough disposable income after paying your bills? Are you comfortable making a mortgage payment of that size? These are questions you need to ask yourself.
What’s the 28% Rule?
Many lenders stick with the 28% rule, which as we discussed above, is 28% of your gross monthly income. Keep in mind that your gross monthly income isn’t the money that you take home. This is the amount of your paycheck before taxes, insurance, and any other deductions. When lenders use 28% of your gross monthly income, they aren’t basing it on the money you actually bring home.
Luckily, that 28% rule does include all components of a mortgage payment. This includes principal, interest, taxes, insurance, and mortgage insurance. The same lenders usually max out your total debt ratio, which includes credit cards, car payments, student loan payments, and personal loans, to 36% of your gross monthly income.
Start Comparing Numbers
So now that you know what your 28% threshold is, it’s time to figure out how it compares to what you pay now. If you currently pay rent, compare the new potential mortgage payment to your rent payment. Is there a lot of payment shock? In other words, does your payment increase a lot? If so, it might be hard to make it work within your budget unless you drastically increased your income lately.
If you don’t rent now, maybe you live with your parents, a mortgage payment of any size is going to be a shock. Make sure you think about the new mortgage payment very carefully. Will you be able to afford it alongside any existing debts you have now? Don’t forget you’ll also need money to maintain and repair the home. You can estimate about 1% of the home’s value as your yearly expense for home maintenance.
Don’t Forget Your Down Payment
The number the lender gives you is based on the mortgage payment you qualify to receive. It may not take into account any down payment you plan on making. You can add the down payment to the total loan amount to come up with the perfect price for a home.
Maybe you are playing with the numbers and trying to decide how much money to put down on a home. Using the loan amount a lender prequalified you for, add different down payments to it to see where that leaves you. Don’t forget that you want an emergency fund in the face of disaster. It’s a good idea to have three to six months of expenses set aside so that you are ready to make emergency repairs or purchases.
Trust Your Instincts
The best thing you can do is trust your own instincts. You know how much you can afford or how much you want to pay for a home. You don’t have to keep up with the Jones’ and buy the biggest house you can find. Buy a home that fits your family comfortably and has a payment that you can afford and that you won’t regret. The last thing you want when you buy a home is buyer’s remorse. Chances are you are going to have this home and the mortgage for the long-term, so make sure it’s something you are okay with before closing on it.
Finding out how much money you need to buy a home means figuring out how much loan you can afford. Get with a few lenders and get yourself prequalified. From there, you can decide how much money you want to put down on a home and go from there.