While everyone would like to live the American Dream of buying and owning a Home, it is important to understand all the costs involved in buying and owning a home.
Many potential first time home buyers sometimes forget to factor in the down payment, homeowners insurance and the possibility of depreciation, as well as the costs associated with closing the transaction, moving, purchasing major appliances, and home, landscape, and pool maintenance, not to mention furnishings and design accessories once you move in. Don’t forget to factor these elements in if you’re wondering if you can afford to buy a house.
For a general idea of your buying power, multiply your gross annual income by 2.5. For example, if you had a household income of $50,000, you might be able to qualify for a $125,000 home. The actual number may be more or less, depending on your individual situation, debts, credit history and whether or not you are a first time home buyer.
How Much Money Do I Need to Buy a Home?
You’ll need money for:
- A down payment
- Closing costs
- Other housing-related costs – mortgage payments, maintenance and repair costs
Housing Expense Ratio
As a general guide, your monthly mortgage payment should be less than or equal to a percentage of your income, usually about a quarter of your gross monthly income. The percentage can change depending on the type of mortgage you choose. However, there are mortgage products available that focus solely on the debt-to-income ratio. Whether this is your vacation home or if you are a first time home buyer, your lender can provide more information on these types of mortgage products.
Your buying power can be affected by factors such as your income, debt and credit history. Your debt, such as credit card bills and car loans, and other expenses such as housing expenses, alimony and child support, should not be more than about 30-40% of your gross income. If you’re wondering if you can afford to buy a house, see if you can make a budget within this range, otherwise you risk overspending.
Your Down Payment
The down payment is a percentage of the value of the property. What percentage that is will be determined by the type of mortgage you select. Down payments usually, range from 3 to 20% of the property value.
As a first time home buyer, know that you may be required to have Private Mortgage Insurance (PMI or MI) if your down payment is less than 20%.
Closing costs include points, taxes, title insurance, financing costs and items that must be prepaid or escrowed and other settlement costs. These costs generally range between 2-7% of the property value. You will receive an estimate of these costs from your lender after you apply for a mortgage.
While it may seem that it can take a lot to actually buy your home, you may be closer than you think.