Dreamy kitchen, spacious backyard, luxury bathroom–it’s easy to get carried away when you’re house hunting. But before you scroll through listings or take house tours, there’s one crucial question you need to answer: How much house can I actually afford?
From personal budget to mortgage fees, you need to factor in everything to reach an estimate. The last thing you want is to be “house poor,” where all your money goes to mortgage payments, leaving next to nothing for day-to-day expenses. Here are five practical tips to help you figure out how much house you can afford:
Calculate Your Monthly Income
First things first, calculate your monthly income. If you’re employed and earn a salary, simply divide your before-tax income by 12. In comparison, if you’re self-employed or have variable incomes, calculate the average of your last 6-12 months’ earnings.
Factor in any additional bonuses, freelance work, or rental earnings. Knowing your monthly income will clarify your financial standing and simplify the next steps.
Consider Monthly Expenses
The next step is analyzing monthly expenses. Start with fixed costs, such as rent, utilities, car payments, insurance, and student loans. Next, move to variable expenses like groceries, shopping, entertainment, and dining out. Lastly, include medical bills and unplanned maintenance costs.
Don’t forget to put aside at least 1% of your income every month for emergency expenses.
Know the 28/36 Rule
The 28/36 rule is pretty straightforward. It states that houses should allocate no more than 28% of their total income to monthly house-related costs, and 36% to total debt, including mortgage, student loans, credit card bills, and other loans.
For instance, if your gross (before-tax) income is $5,000 per month, you should aim to allocate $1,400 to housing costs and $1,800 to total debts.
Think of the 28/36 rule as the starting point for financial stability, especially when you’re considering taking out a mortgage.
Use a Mortgage Affordability Calculator
So, you’ve found a home you love, but don’t know if it’s within your budget. The best thing you can do is use a how much house can I afford calculator. You need to enter your income, monthly debt payments, and available cash for a down payment.
A mortgage affordability calculator allows you to enter different loan terms and down payments to help you weigh your options. You can also reach out to AmeriSave loan experts to clarify any doubts and get near-perfect estimates.
Factor in Fees and Costs
When it comes to acquiring a mortgage, many new homeowners overlook associated fees and costs. These include:
- Appraisal fee
- Broker fee
- Origination fee
- Underwriting fee
- Title fee
In many cases, you have a pay an additional fee to run a credit check. These fees might not seem like a lot, but they can quickly accumulate, leading to unfortunate financial surprises.
After completing these steps, you’ll have a pretty accurate picture of how much house you can afford.
