The amount of house the bank approves you for and the amount of house you can afford are two different things believe it or not. When I sit down with my clients for their buyer consultation, I always make sure to tell them this because I think people truly don't understand there's a difference. By that, I mean what is a mortgage you would be comfortable paying without putting yourself in a financial strain.
Here's a few tips on how to determine how much house you truly can afford:
First thing you need to do is figure out how much you (and your partner or co-borrower, if applicable) earn each month. It's really a good practice to base this amount on what you actually bring home, your net, versus your gross, what you make. There's a huge difference in what you make vs what you actually bring home. What you bring home is after taxes, medical coverage, 401K savings, etc has come out your check and what actually hits your bank account for you to spend towards your monthly bills/debt.
Second, list your estimated housing costs and your total down payment including taxes, homeowners insurance, estimated mortgage insurance, HOA fees (if applicable) and the loan term. The most popular loan term is 30 years, but can be shorter.
Last, tally up your expenses. This is all the money that goes out every month including money you blow on eating out, having fun, self care, partying, clubbing, spending money on clothing, etc. This step is important because you don't want to leave out anything so you can truly see how much money you have to spend on the cost of your mortgage, comfortably.
The last thing you want to do is be what I like to call "house poor" which basically means getting a house and the only thing you can afford is just the house. You don't have any discretionary income to do anything with such as save for emergencies, buy food, vacation, or even buy furniture to put in the house for that matter. Believe it or not, there a lot of people who are "house poor" because most people tend to max out their loan. They go out and get a house for exactly what the lender told them they can afford and end up struggling to keep the house. Remember, getting the house is easy, keeping it is where the work comes in.
Hopefully this helps you in determining how much house you can truly afford. We don't want to get the house just to end up in foreclosure a year later. Owning a home isn't as hard as people make it seem, but it's important to know and understand certain things about buying and maintaining a house before making a purchase.
As always, happy house shopping!
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