When planning a home purchase most buyers sit down with a mortgage officer to run numbers and determine the loan amount that they can afford. This calculation will take into consideration the downpayment available for the purchase as well as reported income, bank accounts and any debts. Your mortgage officer will thoroughly review all the numbers before they give you a pre qualification amount. This number combined with your downpayment will tell you the price range that you can comfortably look for homes in.
When you receive your pre-qualification letter this is the number that your lender has calculated that you can borrow based on your income and debts. This number does not take into consideration the trip to Europe you’ve been saving for that may have to be put on hold, saving for retirement or future expenses you may not be expecting such as a new car or a new boiler or refrigerator.
If you use online budget calculators they will usually suggest that your mortgage payment should be 35% of your monthly income. This is a good rule of thumb but one budget tool does not fit all.
It’s up to you to decide how much you can really afford. Owning a home can be an excellent investment. However if you choose a home that is at your max budget it may mean sacrificing some splurges that you may currently enjoy. These are the things to think about before buying a house at the top of your budget.
- How much will it cost to maintain your home?
- How much do you want to put away each month into savings or investments?
- What will your basic living expenses cost?
- What is your current income? Could it change?
- How much is your downpayment? Could you put down more?
- Does the house need work? Will there be renovation expenses?
Looking at these expenses more closely and thinking about your lifestyle will help you answer the question, ‘how much can I afford?’
The tools your loan officer uses to determine your mortgage pre-qualification will tell you what your income and debt will allow you to afford. You have to decide if you want to borrow that amount or if you’re more comfortable cutting the budget a little and giving yourself some extra money each month that you can save, spend or apply to your mortgage in order to pay down the principal balance faster.
One important to thing to keep in mind is that the list price for a home is not always the price you end up paying. You can offer less but you need to be prepared that the seller may not accept your offer. It is never a good idea to look at houses outside your budget and hope that the seller will take less. You may end up over budget or disappointed.
Schedule an appointment with a loan officer at Title Mortgage today to talk budgets and find out what your pre-qualification numbers are. Our loan officers can help you decide how much house you can afford and help you take into consideration the extra savings you want to do monthly for your retirement, or your trip to Europe.