How much house can you afford?
By Kurt Real Estate Aug 12, 2020
How much house can you afford? It’s a thought on many people’s minds these days. With rates at all-time lows and COVID changing our needs for more yard space and at-home offices, buyers are coming out of the woodwork. Whether you’re renting and looking to buy a house or the home you own now is just a little too tight for the whole family, you’re probably wondering, just how much house can you afford.
For renters, a simple rent-to-mortgage comparison is about $4 per $1000 at today’s current rates. That means, if you’re paying $2000 in rent, your equivalent mortgage payment would get you something around $500,000. However, before you set a max budget, it is important you do some prep work.
First and foremost, you should create a budget that you will stick to. If you’re purchasing in Orange County, most likely you’re buying a previously owned home as newly built developments are few and far between. Buying a previously owned home means you’re not only limited to what is on the market, but you are buying something that was done to someone else’s tastes. You may have to forego some features to get something within your budget. Just remember, many features about a home can be changed. Just because it doesn’t have a kitchen island or recessed lighting or hardwood floors doesn’t mean those things can’t be added or changed later on. It’s important to focus on the main benefits you want from a house rather than the features. Things like location you cannot change.
Second, calculate how much house you realistically can afford. Are all the homes in your price range in HOA communities? If so, how does that affect what you can afford? How much do you plan to put down? Will you need to pay mortgage insurance? Don’t forget to add in taxes and insurance!
Lenders will use the percentage of your gross monthly income as a guide. They will evaluate your debt-to-income (DTI) ratio along with credit among several other factors. Some lenders will go as high as 43-49 percent on your DTI.
You may be wondering how to know exactly what your debt-to-income ratio is? The answer is pretty simple. Add up all your monthly expenses and divide that by your monthly gross income. Knowing your DTI can be incredibly helpful in identifying where you can minimize your debt. Some common monthly expenses are:
Cell phone bills
Credit card payments
Rent or mortgage payment
Once you identify how much you can afford on a monthly payment, you’ll need to be realistic about what you can put down. Remember, part of purchasing a home involves paying closing costs. Closing costs include: escrow and title fees, lender’s fees, HOA dues, property taxes, etc. You can bank on about 1 percent of the purchase price in closing costs due at the close of escrow on top of your down payment.
The absolute minimum you can put down on a conventional loan is 3 percent, 3.5 percent for an FHA loan. However, if you can afford to put 20 percent down, you can avoid private mortgage insurance (PMI), which adds to your monthly payment. The purpose of PMI is to offer some protection to lenders if you were to default on the loan.
A main consideration which has attracted many buyers is low interest rates. A key factor to obtaining the best interest rate is your credit score. If your FICO is between 700-720 you will likely qualify for a different rate than if your score is greater than 720. Therefore, if you’re planning to buy, check your score and see how you might improve it. Even a difference of .10 percent in your interest rate makes a big difference over time!
Lastly, you will want to plan for maintenance and repairs. We can’t emphasize enough how important it is to have some reserves. You will thank yourself later. While you do have a home warranty in place for your first year in the home, you never know when something unexpected will occur. They call it a rainy-day fund for a reason! Don’t spend every dime you have squeezing into something you can’t comfortably afford. No one wants to be house poor.
If you’re thinking about buying, the time to start planning is now…and we can help! At the Kurt Real Estate Group, we have a team of professionals that specialize in buying real estate and can connect you with some of the best lenders in the biz to help you get the most competitive rates. Shopping for a house is one thing, getting the house in this competitive market is another. You want to make sure you have the right pro on your side. If you want to hear about our 5 strategies to win in a multiple offer situation, contact us here or call our recorded line at 877-957-6677 ext. 2
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