So, you’ve decided to enter the housing market. It is an exciting time of life. Renting has its perks – you don’t have to foot the bill for repairs and maintenance. However, waiting for the work to be done, especially critical repairs can be a headache if your landlord is not on the ball. As well, an owned house is more likely to become a treasured home. And it is certainly a great investment financially as long as you can afford that investment.
You’ve worked hard to accumulate a down payment by faithfully saving each month. But, how do you know how much house you can afford? It can be an intimidating process but with a little planning you’ve got this.
Factors to Consider Before Deciding How Much House You Can Afford
There are 4 big factors to consider before deciding to tackle the housing market:
1. Your gross monthly income.
2. The present interest rates.
3. Your monthly expenses:
- Car payment(s)
- Credit card payment(s)
- Other debts/payments
4. Costs of a new home:
- Property taxes which vary depending on house price, lot size and location
- Utilities including electricity, heating/cooling, water
- Homeowners insurance
- Maintenance and repairs – the reality of home ownership
The following is a great rule of thumb to follow when considering home ownership:
Keep in mind the 32/40 rule
Your monthly housing costs (mortgage payment, heating/other utilities, property taxes) shouldn’t exceed 32% of your gross household monthly income. When you add any other monthly debts like credit cards or car payments, the sum should not exceed 40% of your household monthly income.
According to CNN Money, another good rule of thumb is to aim for a house that costs about 2½ times your gross annual salary. If you already have accumulated debt, this figure will be lower.
Other Factors to Consider Before Entering the Housing Market
There are other factors to consider before searching for a home. A down payment is essential. Most lending institutions are looking for at least a 20% down payment. Anything less and you will likely need to purchase personal mortgage insurance adding to the cost of buying a home. A bigger down payment will give you more leverage when negotiating borrowing terms.
Another consideration before entering the housing market should be your present lifestyle. You want to make sure that your monthly housing costs are not resulting in you having to sacrifice all of your present indulgences. Do you like to eat out regularly? Do you love your yearly or more often vacations? Home ownership may require some sacrifice, but you don’t want to abandon all your joy for the sake of getting in over your head when buying a home.
Home ownership has been a rite of passage for decades. It is getting harder in some markets but with careful planning and saving it is still an attainable dream. Keep the 4 big factors in mind before deciding how much house you can afford and make it your reality.