If you’ve been thinking about buying a house, and you aren’t sure how much of a house you can afford or how much you should spend, you aren’t alone. One question I get a lot is how do people afford a $300,000 house. Well, here’s what you need to do just that.
How Do People Afford a $300,000 House?
Being able to afford a $300,000 dollar house really comes down to a couple of things. One, how much money you make, and two, how much money you owe.
Secondly, you need to make enough money to actually afford the house, but exactly how much money is needed for a $300,000 dollar home?
Understanding the 25 Percent Rule
Put simply, you want to be sure your housing costs are no more than 25 percent of your take-home pay.
Housing costs include:
- Mortgage payment
- Mortgage insurance
- Property tax
That means if your monthly income is $6,000 after taxes, you should be able to comfortably afford a $1,500 monthly mortgage payment.
(That’s an annual income of about $100,000 dollars.)
With this monthly income or annual income, you should qualify for a $300,000 dollar house. Otherwise, this house would be outside of your price range.
If you have enough money for a 20 percent down payment, then you could buy a house for more than $300,000 dollars and still be able to make your mortgage payments without too much trouble.
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How Much Do You Need for a Down Payment?
Most banks and lenders will be looking for a 20 percent downpayment when you are buying real estate.
That means if you are buying a $300,000 dollar house you will need $60,000 dollars for your downpayment.
It’s a lot of money to come up with.
If you can’t, you may qualify for an FHA loan. If so, you will be able to put down less money.
Do keep in mind, that if you don’t have a 20 percent downpayment, then there is a good chance your lender will require private mortgage insurance.
This will add to your monthly payment.
There are some assistance programs that will help cover the cost of your down payment.
Ask your lender if they offer this type of assistance.
Also, don’t forget that you will need money for closing costs as well.
Closing costs tend to run in the 3 to 5 percent range.
So, for a $300,000 house, you will need an additional $9,000 to $15,000 dollars to cover your closing costs.
Other Considerations When Buying a Home
While your income and debt are two big considerations to whether or not you will be able to afford a $300,000 dollar house, your bank will also look at other areas of your finances to determine whether or not they will approve your mortgage.
Debt to Income Ratio
The income ratio goes back to how much debt you have.
Your lender will want to determine how much debt you have compared to your income.
It is a simple calculation.
Add up all of your monthly debt payments and then divide that by your monthly gross income.
So, if you have an income of $3,500 per month and all of your debt payments equal $1,500 per month, you would have a debt to income ratio of 42 percent.
Most lenders are looking for a debt to income ratio of 36 percent or less, but some will go as high as 43 percent.
That means if you want to buy a $300,000 house and you make $6,000 per month, your monthly debt can’t be more than $2,160.
What is considered monthly debt? It includes the following.
Another cost of buying a home is property taxes.
These will add to the cost of your monthly payment as they are typically rolled into your mortgage.
The money for your taxes and home owner’s insurance is kept in escrow by the lender and then paid when they are due.
The larger and more expensive your home, the more your taxes will be.
The location of your home will also affect your tax cost. If you live in a larger city they will be higher and if you live in the middle of the country in a smaller town, they will most likely be less.
Your Credit Score
Your lender will also take a very close look at your credit score.
The better your score the lower the interest rate on your house will be.
Most lenders are looking for a score of 740 or higher.
Some lenders will go as low as 620, but you will pay a premium when it comes to your interest rate.
If your score is lower, you may want to consider working to raise it and reduce your debt before buying a new home.
Don’t Let Someone Else Decide Your Purchase Price
When you’re in the process of buying a new home, the excitement may lead you down the wrong path.
It’s the same as buying a new car.
You go to the dealership with the intent of buying an inexpensive, midsize car that’s good on gas mileage and end up driving home some monster-sized gas-guzzling SUV.
The excitement of buying the car, with the encouragement of the salesman, causes you to throw out your best intentions and give in to the new car smell of a car that is much more than you were planning to buy.
Hey, I’ve been there myself.
The same can happen when buying a new home.
You go to the bank and they approve you for a much larger loan than you expected.
Then you go to the real estate office and you share that information with the realtor.
It only makes sense that the bank wants you to take a large loan so they make more money on interest, and the realtor wants you to buy the most expensive house possible so they make more on their commission.
In the excitement, you might forget that you have to make these payments for the next 30 years, and depending on your financial situation, you could in up in a difficult position.
Instead, don’t let someone else decide how much house you should buy.
Have a good handle on your personal financial situation before you start the buying process.
Decide how much of a monthly payment you can really afford and stick with it.
In other words, don’t buy a house at the top of the mortgage loan you are being offered unless you can actually afford it without causing you to stress each month.
If you’re wondering just how much you can afford or if you can afford a $300,000 dollar house, here is a free mortgage calculator you can use to find out.
What are Mortgage Points?
There are two different types of mortgage points, but all points equal one percent of your loan amount.
That means if your loan is for $300,000 dollars one point would equal $3,000 dollars.
One type is called origination points. This type is used as a payment to the loan officer for their work in originating the loan.
These points can be negotiated and reduced.
The second type of point is a discount point.
A discount point is pre-paid interest.
For each point, you are pre-paying .25 percent of one percent of your interest rate.
You can typically purchase up to three discount points.
For example, if your loan amount is $300,000 and your interest rate is 3 percent, and you purchase 3 discount points, your interest rate would be reduced to 2.25 percent.
This would cost you $9,000 dollars upfront.
To Sum it All Up:
Buying a home is a major purchase. With today’s housing costs, you will be spending thousands of dollars over the course of your mortgage. Deciding if you can afford a $300,000 dollar house will depend on your household income, your monthly obligations, your income to debt ratio, and your credit score.