There are many factors to consider when asking how much you should spend on a house. Factors that can make a huge difference in the price of your home include location, size, age, and features. But how do you decide how much to spend on a house when you’re looking to buy? Here are some questions you need to answer before you sign on the dotted line.
How Much to Spend on a House
There are a number of factors to consider when purchasing your home.
For instance, what are you going to do with it?
If you intend it as an investment property then it may be worth spending the extra money for a more desirable location or newer model than if you intend it for personal use where rental prices are less of a consideration.
You must consider the availability of financing.
Other things to consider are the local economy and employment rate, cost of living, and getting a good real estate agent.
If it is a seller’s market the prices will be higher than if it is a buyer’s market.
If there is a lot of construction going on nearby then that would be a good sign that the area will increase in value over time.
Construction is a great way to attract new families into the community which increases the demand for houses.
So, once you’ve looked into the real estate market, you need to ask yourself a few questions to help determine how much you should spend on a house.
1. Your Debt to Income Ratio
Your debt to income ratio compares your total debts to your monthly pre-tax income.
These debts include things such as your mortgage payments and insurance. You want to keep your housing expenses at 28 percent of your monthly income or lower if possible.
So, let’s say you make $3,500 dollars per month before they take taxes out. That means you would be able to afford $980 dollars per month for your mortgage, taxes, and insurance.
($3,500 x .28 = $980.)
If you were looking to buy a home that would cost you $1,200 dollars per month, most likely a lender wouldn’t approve the loan because your debt to income ratio would be 34 percent.
($1,200 / $3,500 = .34)
You’ll also want to understand the 28/36 rule.
This will help you calculate how much house you can afford.
As mentioned, you shouldn’t spend more than 28 percent of your monthly income on your housing costs. The second half of this calculation deals with the rest of your debts.
It says that your total monthly debt payments including housing costs, credit cards, personal loans, student loans, and so on shouldn’t be more than 36 percent of your monthly income.
If your monthly housing costs exceed 30 percent and other debts like credit card and student loan payments exceed 10% then you would be at 40 percent of your income paying for your debts.
This could put you in a difficult financial situation down the line.
2. Do You Have a 20 Percent Downpayment
If you do not have a 20 percent down payment, you can still purchase a home but it will be more difficult.
Most lenders will want you to have a 20 percent downpayment.
That means if you are buying a $200,000 dollar home, you will need $40,000 dollars as your downpayment.
If you don’t have 20 percent to put down, then you will be required to purchase private mortgage insurance.
This will increase your monthly mortgage payment.
So, when it comes to how much you should spend on a house, keep in mind the downpayment.
Make sure you don’t buy a house that will force you to put down less than 20 percent.
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3. Do You Have Enough For Closing Costs
Closing costs are the fees that you pay at closing and they will typically cost somewhere between 2 and 5 percent of the total cost of your new home.
That means if you are buying that $200,000 dollar home, you will need to come up with an additional $4,000 to $10,000 dollars at closing.
You’ll want to make sure you have enough money to cover these costs. This will also help you determine how much house you can afford.
4. What About Taxes
Don’t forget about property taxes.
You can ask your realtor what the taxes are on the home you are interested in buying.
Be sure you can afford these as well.
They will add to your monthly mortgage payment.
If all of these expenses make buying a home out of reach, you might consider a different type of loan.
You should consider a VA mortgage, FHA mortgage, or Home equity loan/lines of credit.
How many houses Can I Afford with an FHA Loan?
The FHA loan is a type of mortgage that many first-time homebuyers choose when they are unable to make the large down payment than conventional loans require.
You can have a downpayment as low as 3.5 percent to purchase the home.
The minimum 3.5 percent down payment requirement makes a house more affordable for first-time homebuyers.
Keep in mind, that your mortgage payments will be higher with a smaller downpayment.
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To Sum it All Up:
When you’re buying a house, take the time to determine how much you can afford before you start looking at homes. It is easy to get caught up in all of the excitement.
Don’t let your realtor talk you into a home you can’t afford and don’t buy a more expensive home just because the bank offers you more money than you need. Create a house buying budget based on your personal situation and stick to it. You’ll be happy you did once you have to start making house payments.