Affording a Home: It’s Getting Trickier
Home Buying can be tricky for first time homebuyers. When the mortgage rates are at all-time lows the housing market favors the buyers so this might be the time to buy.
The question is how much can you afford. A real estate agent might make the following suggestions to assist you in your decision.
Before considering entering the real estate market you should be ready to make at least a 20% down payment on your new home and plan to remain in it for more than 10 years. The 10 year factor simply increases the probability of you coming out financially ahead after you factor in the costs of buying your home, selling your home, and living in the home. If you think you might stay in a house for less than 10 years you should consider renting.
The rule of three.
Take a look at the amount of money your spouse and you make before taxes in a year. As an example if one of you makes $40,000 a year and another makes $50,000 a year your total household income would be $90,000. Now multiply that amount by 3.That would mean that you could afford a house that costs up to $270,000.
Housing related expenses.
Housing related expenses like mortgage payment with interest, real estate taxes, and insurance as a homeowner should be less than 28% of your monthly income. Like the example above if your total yearly income were $90,000 the monthly income would be $7500. So your monthly housing expense should be less than $2100.
Your total debt obligations.
Consider all debt obligations you have including credit card debt, student loan debt, monthly car payments, and any other debts you have. Your total debt payment should be less than 36% of your total household gross income.
As an example say you make a $250 student loan payment, a $500 car loan payment, and a $750 credit card payment. If you add all these debts up you only have $1200 left to make a house payment. That means you cannot afford a home that costs more than $170,000. Your $300,000 home is out of reach.
These are the reasons it is important that you limit your debt compared to your income before you add more debt like mortgage.
Buying a home and owning it can be an exciting experience but it is not always the best choice for everyone. If you want home ownership to feel rewarding the home should be both financially and physically comfortable.
Gennady Barsky is the Vice Chairman and Chief Financial Officer at JetSmarter.