Buying a home is one of the most significant financial decisions you’ll make in your life. It’s exciting to think about owning your own place, but it’s crucial to understand how much house you can truly afford before you start house hunting. We’re here to help you navigate the process and make informed decisions.
Assess Your Financial Situation
Before you start looking at homes, take a close look at your financial situation. Here are some key factors to consider:
- Income: Your monthly income will be a primary factor in determining how much you can afford to spend on a mortgage.
- Debt: Consider your existing debts, such as car loans, student loans, and credit card debt. Your debt-to-income ratio (DTI) is an important factor lenders use to evaluate your ability to take on a mortgage.
- Credit Score: A higher credit score can help you secure a better mortgage rate, which can increase your purchasing power.
- Down Payment: The size of your down payment can affect your mortgage terms. A larger down payment can lower your monthly payments and may eliminate the need for private mortgage insurance (PMI).
Understanding Mortgage Terms
When considering how much house you can afford, it’s essential to understand the key components of a mortgage:
- Principal: The amount of money you borrow.
- Interest: The cost of borrowing the money, expressed as an annual percentage rate (APR).
- Taxes and Insurance: Property taxes and homeowners insurance, which are often included in your monthly mortgage payment called an escrow account. Property taxes can range anywhere from .32% to 2.35% of the assessed value of the home in the United States.
Calculate Your Budget
A general rule of thumb is to keep your mortgage payment, including taxes and insurance, at or below 28% of your gross monthly income. Additionally, your total monthly debt payments (including your mortgage) should not exceed 36% of your gross monthly income.
To get a clearer picture of how much house you can afford, use Excite Credit Union’s Mortgage Calculator. This tool allows you to input your financial details and provides an estimate of your affordable home price and monthly mortgage payment.
Additional Costs to Consider
When budgeting for a new home, remember to account for additional costs, such as:
- Closing Costs: Fees and expenses associated with finalizing your mortgage, typically ranging from 2 points to 5 points of the loan amount. A point is the percentage of the loan, so 2 points equals 2% of the loan.
- Maintenance and Repairs: Ongoing costs to maintain your home.
- Utilities: Monthly expenses for electricity, water, gas, and other services.
- HOA Fees: If your home is part of a homeowners association, you may have monthly or annual fees.
- Reserves: Funds that underwriters expect you to have in savings to cover mortgage payments in case of financial emergencies.
Get Pre-Approved
Getting pre-approved for a mortgage gives you a clear understanding of how much you can borrow and shows sellers that you’re a serious buyer. At Excite, we offer pre-approval services to help you streamline the home-buying process.
Determining how much house you can afford is a critical step in the home-buying journey. By carefully assessing your financial situation and using tools like the Mortgage Calculator, you can make informed decisions and find a home that fits your budget, bringing you one step closer to your dream home!
