Whether you’re buying a home for the first time or considering a move into a new home, how much you can afford—in terms of a mortgage and general housing expenses—is the biggest calculation you’ll need to make.
To figure out how much you can afford, first you’ll need to calculate how much of your gross monthly income can go towards your mortgage. When doing the math, your goal is to have your monthly mortgage payment not exceed 28 percent of your gross monthly income, although that percentage isn’t necessarily set in stone. However, if your calculations come to quite a bit more than 28 percent, then you may need to scale back on how much you can afford in terms of a monthly mortgage payment.
Next, figure out your total debt and what percentage of your gross monthly income goes to that debt. This calculation will give you a rough estimate of your total household expenses. As a rule, your total debt should be no more than 36 percent of your income. Much like your earlier calculations with your monthly mortgage payment, 36 percent is just a general guideline and you may come in over or under that number by a couple of percentage points.
Once you’re comfortable with those figures, take into consideration general expenses directly relating to your new home. Not only should you look at one-time expenses such as moving and renovations, but—more importantly—also look at general homeowner expenses that you may incur each month such as maintenance, homeowners’ association fees and unexpected home repairs. For this, it’s a good idea to budget in 30-40 percent more than your monthly mortgage payment.
Finally, after you’re done with your own budgeting, you’ll need to get a pre-approval from your lender. With a pre-approval, a lender determines how much they are willing to lend to you by assessing your income, assets, employment and credit history. Once you have a pre-approval, you’ll know what your price range is for buying a home. Keep in mind that the purchase price of your new home doesn’t need to be the same as what your lender is willing to lend—it’s okay to buy a home that’s less than what you’re approved for.
The key to not overextending yourself is to make sure to leave plenty of space in your budget for unforeseen costs and expenses. If you’re going to err, make sure you err on the side of affordability. ∆
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