Paying for housing is one of the largest costs that most adults have. And if you plan to mortgage a home this will be your largest financial commitment for at least the next 15 to 30 years. When taking on this large seemingly lifetime commitment it is important to make sure you are well aware of what you can afford financially and not get in over your head. You don’t want to end up with a mortgage payment that stretches your budget too tight.
Before home shopping, it is best to go over your finances with a fine toothcomb and set a price limit of what you can comfortably afford. There is what the lender will offer you and say they will approve for you to borrow and then there are the real numbers and what you will be comfortable paying to enable you to live the lifestyle you wish to live.
Calculating how much home you can afford
There are many different methods you could use to calculate what would be a comfortable home payment for your household. One of the quickest ways that some people choose is to pull up an online budget calculator and punch in all of your personal financial details.
Some online budget calculators can help you figure out details that would qualify you for a mortgage such as your debt-to-income ratio. And what a potential hypothetical home budget could look like for your personal finances.
The basics of calculating how much home you can afford are to calculate all of your income sources and add them together and then calculate all of your required monthly bills minus your current house payment or rental payment. Then add up an average cost of essentials like groceries and gas. This will show you how much money you have outside of other costs to pay for a home and any lifestyle expenses.
Related: 5 Surprising Things about Home Buying
Using the 28/36 rule
Some lenders determine a borrower’s ability to remain financially stable while paying off a potential mortgage with the 28/36 rule
This rule is of the theory that housing expenses should not be any more than 28% of pretax income for a household. These expenses include monthly principal and mortgage interest rate payments, home insurance payments, property tax responsibilities, and any private mortgage insurance if it is required to be carried.
The 36 part of the rule says that a borrower’s total debt should not come to more than 36% of your total pretax income. This includes any of the borrower’s housing expenses listed above as well as mandatory bills that need to be paid including credit cards, car loan, personal loan, student debt, and other monthly responsibilities like utility payments and cable and telephone that are expected to continue for the next 10 months or more. This does not however include expenses like groceries, gas, and your current rent payment.
To put it into a number example if the loan applicant makes $5000 a month this rule is of the theory that they should not spend any more than $1400 a month on housing costs. Remember this includes not just the mortgage payment but another cost of living in a home, like insurance and taxes.
The main goal
The main focus of determining how much house you can afford is to make sure you are not taking on a home payment that would cause you to live in a tight financial situation where you are not enjoying everyday life because all of your money is tied up in payments.
You want to make sure you have plenty of money to comfortably make your mortgage payments but also to make the other payments that come along with homeownership like insurance and the ability to make repairs or to update or purchase items you may need for your home to run smoothly. You want to be able to afford all these things and still be able to go out to dinner once in a while or buy yourself something fun.
For more information on purchasing a home in St. George and surrounding areas please contact us anytime.
For more information on purchasing a home in Saint George and surrounding areas please contact me any time.
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