How many houses can I afford?

You have decided to pursue the American dream and acquire this house, whether it is your first or to trade it. Either way, buying a home is big business, period. One of the first and most important things you will need to do is figure out how much house you can afford.

Chances are you have a picture in your mind of your future abode – the number of bedrooms and bathrooms, that spacious backyard, and whatever else tops your list. This is the fun part. But going from fantasy to reality also takes work.

How much mortgage you can afford depends on things like your income, credit score, down payment amount, debt, savings and more. Read on to start budgeting for your home.

Mortgage

Affordability Calculator

The good news is that there are online calculators that can make this task easier. Plug in factors like income, estimated down payment, length of loan, how much you spend on debt per month, and your credit score and you’ll have an idea of ​​what you can and can’t afford.

How to budget for a house

When you’re thinking about buying a home, it’s easy to focus on your monthly mortgage payment amount and down payment, ideally 20%. But there are many other things to consider and plan for. You need to budget accordingly. Remember that the costs include:

• Property taxes: The average single-family home in the United States had $3,719 in property taxes, for an effective rate of 1.1%according to MortgageCalculator.org, a provider of mortgage education information.
• Closing costs: These include loan origination, appraisal, title search fees, credit report fees and others, which together can add up to at least 2-3% of the purchase price of your home.
• Home insurance: The average homeowner pays $1,400 per year— or about $123 per month, assuming a standard deductible of $1,000, according to The Zebra, an online insurance marketplace.
• Routine maintenance and unexpected repairs: It can work 1% to 4% the value of your home, according to Realtor.com
• PMI, or private mortgage insurance: If you deposit less than 20%, you may have to pay PMI, which compensates the lender for default. The PMI can vary from 0.5% to 2% of the value of your home. Freddie Mac uses an estimate of 0.51% the amount borrowed per year in its sample budgets.
• Co-ownership fees: These are frequently $200 to $300 per month according to Realtor.com.
• Utilities: Expect around $6,000 per yearwhich includes streaming services, telephone, garbage, sewer, garbage, electricity, natural gas, water and internet, according to mobile website Move.org.
• Tax breaks: Among all the costs, don’t forget one of the advantages of home ownership, the mortgage interest deduction. You can deduct mortgage interest up to the first $750,000 of debt for married couples filing jointly.

What is your debt to income ratio?

When it comes to determining how much you can afford and getting approved for a loan, a lot depends on your debt-to-equity ratio, or DTI.

It is a measure of the amount of debt you have compared to to your income. DTI, usually expressed as a percentage, is calculated by dividing the amount of your monthly repayments by the amount of your monthly pre-tax income.

There are two classic versions of DTI, and lenders look at both. A version of DTI compares your monthly income to your monthly housing costs. In this scenario, you should aim to have a DTI no higher than 28%.

The other version of a DTI not only includes housing costs, but also other forms of debt like credit cards or other loans. Lenders prefer that the total of your housing costs and debts not exceed 36%. If these exceed 43%, you cannot be considered for a loan at all.

Fees to include in your DTI accommodation

• director
• interest
• property taxes
• mortgage interest

Additional costs to include in your broader DTI

• credit card debt
• car loans
• student loans
• Other installment loans

How much house can I afford without putting 20% ​​down?

Struggling for come with a deposit? It’s true that 20% is the classic rule of thumb. But there are many ways to buy with a small amount of money. In fact, the typical down payment for first-time home buyers is only about 7%according to the National Association of Realtors.

However, buying a home with little down can limit your budget. Not only does this mean you have to borrow more to reach the same purchase price, but you may have to pay private mortgage insurance or other fees, at least until you’ve built up equity in your house. The cost of PMI ranges from 0.5% to nearly 2% of the original loan amount per year.

Another popular option for low repayment loans, an FHA mortgage, doesn’t require PMI, but you don’t get away with it unscathed. Instead, you will have to pay the initial mortgage insurance premium, which is equal to 1.75% of the base loan amount, and a mortgage insurance premium, or MIP, which can range from 0.45% to 1.05%.

While you may eventually stop paying PMI or a mortgage insurance premium as your home’s equity increases, in the short term this could have a big impact on how much mortgage you can afford. .

Shri Ganaeshram, founder of awning.com, a real estate company for investors, offers an example: suppose you have a mortgage of $300,000 with a down payment of 20% (or $60,000) and a mortgage rate of 7 .5%. You have a monthly bill of $1,678.

However, if you have the same $300,000 mortgage with a 10% (or $30,000) down payment and the same 7.5% interest rate, you’ll end up owing $1,888 a month to cover the capital and additional interest. Add another 2% for the PMI and your monthly bill jumps to $2,388. The result: you have to recalibrate your budget and look for a smaller house.

The pros and cons of stretching to buy a house

There are a few things to consider before deciding to stretch your budget to buy your dream home. “There’s nothing like coming home to a place you love, but stretching your budget can be risky. You could find yourself financially in over your head,” warns Samantha Hawrylack, co-founder of How to shoota personal finance blog.

That said, there are times when experts say it’s okay to think big. One problem: When you factor in costs like taxes, realtor’s commission, and other costs, selling your current home to buy a new one is often an expensive proposition. Ultimately, you need to budget 10% of the value of your current home for these costs, according to a long-standing rule of thumb.

This means that stretching to fit your budget into a dream home can be prudent in certain circumstances. If you plan to stretch, says Ganesham, make sure the home is adaptable to any future lifestyle changes, whether it’s having kids or aging in place. And, if you can, aim to stay for at least a decade. That should be long enough to avoid a big risk of owning an expensive home: getting trapped if property prices in your area drop and you find yourself temporarily underwater, that is- that is, you own more on your mortgage than your home is worth.