How much can I afford How Much Home Can I Afford?
It’s easy to get carried away when you start looking at beautiful homes on the internet and want to buy one!
But, before you start rushing around looking at some of your dream homes, take some time to work out just exactly how much you can afford.
It’s actually quite easy to work out such amount, but read on and we’ll tell you exactly how to do it:
How do I calculate what I can afford?
A good rule of thumb is using the 28%/36% rule, which states that you shouldn’t spend more than 28% of your gross monthly income on home-related costs and 36% on total debts, including your mortgage, credit cards and other loans like auto and student loans.
Example: If you earn $4,500 a month, your monthly mortgage payment for your house shouldn’t exceed $1,260 home-related costs and 1,620 on total debts.
The 28%/36% rule is a accepted starting point for determining home affordability, but you’ll still want to take your entire financial situation into account when considering how much house you can afford.
Review Your Savings
These savings should be money you have specifically saved for the purchase of a property.
It’s wise not to use all of your savings for buying a home. This is because you may have other needs for your money. You never know when there might be an unexpected expense (ie you have to buy a new car if your old one breaks down).
How much can I afford? Typically, to buy a property you will need to have 10-20% of the purchase price saved up. This amount will be for the deposit or initial payment. This deposit is sometimes called the “buyer’s equity”. The rest of the purchase price will be provided via a mortgage loan.
So, as an example, if the home you wish to buy is $300,000, you will need $30,000-60,000 in savings as a down payment.
The mortgage loan you can obtain
There are a variety of factors which determine how much a mortgage provider will lend you to buy a home.
Basically, the most important point is the salary you earn. Your job security and prospects are also taken into account.
As a general rule, mortgage lenders will lend an applicant 4 or 4.5 times his/her gross salary, ie before any taxes or expenses are deducted. In some cases, this can reach 5 or 6 times.
In any event, mortgage repayments should not exceed 28% of your pre-tax income. This includes property taxes and home insurance. A further limitation is that your total debt should be no more than 36% of your pre-tax income. Total debt meaning your mortgage and other debt such as car loans or student loan repayments.
How much can I afford? As an example, simplistically, if your salary is $80,000 per year, you may be able to get a mortgage loan of $320,000-360,000. Of this, your annual mortgage repayments should not exceed $22,400 (28% of $80,000) and your total annual debt repayments $28,800, or around 36% of your $80,000 salary.
If you have a partner who is working and receiving a salary, their income may be taken into account if they will also be responsible to help with mortgage repayments.
What can I afford – Do the Math Before Starting the Process
It’s possible to find online a mortgage payment/repayment calculator to help you work out how much your monthly payments will be. This calculator also takes into account changes in interest rates.
Total up your savings and the amount of the mortgage the lender will provide to find out how much in total you can afford. From the example above, a buyer should be looking at buying a home for between $350,000-420,000. That is, $30,000-60,000 (initial payment) plus a loan of $320,000-360,000.
Of course, you are not obliged to buy a home for the maximum amount you can afford, and it may be prudent to not “max out” the loan you are offered if you can help it.