home buying

How Much House Can I Afford?

11 Minute Read

Buying a home can be lots of fun. It’s exciting to see all those years of dreaming come to life in a place you can finally call your own.

With so many possibilities at your fingertips, it's easy to get caught up in the excitement before asking yourself the most important question of all: How much house can I afford? It doesn’t matter if the kitchen is fabulous or the backyard is big. If you can’t pay the mortgage each month or find the cash to fix what’s broken, your home will never be a blessing.

Figuring out how much house you can afford doesn't have to be rocket science. These home affordability questions can help you buy a home in your budget.

Home Affordability Checklist

Before you search for homes or find a real estate agent, it’s important to ensure you’re financially ready and can actually afford the house you want to buy. This handy checklist is a great place to start. If you can’t say yes to all six questions, it’s best to put your home purchase on hold.

  • Am I debt-free with three to six months of expenses in an emergency fund?
  • Can I make at least a 10% (preferably a 20%) down payment?
  • Do I have enough cash to cover closing costs and moving expenses?
  • Is the house payment 25% or less of my monthly take-home pay?
  • Can I afford to take out a 15-year fixed-rate loan?
  • Can I afford ongoing maintenance and utilities for this home?

Let’s dig a little deeper to see how three simple steps can help you answer the question you’re really dying to know: “How much house can I afford?” Better yet, use our home affordability calculator to estimate how much house you can really afford based on your monthly take-home pay.

How Much House Can I Afford?

Buying a home can be lots of fun. After all, your years of dreaming of a place you can finally call your own are finally coming to life!

In the home-buying process, there’s so much that happens at once. So it's easy to get caught up in all the excitement before asking yourself the most important question of all: How much house can I afford? It doesn’t matter if the kitchen is fabulous or the backyard is big. If you can’t pay the mortgage each month or find the cash to fix what’s broken, your home will never be a blessing.

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Figuring out how much house you can afford doesn't have to be rocket science. These five simple steps will put you on the path to a home you’ll love that’s in your budget.

Step 1: Start With a Solid Foundation

Too many people go broke buying a home because they think it’s the grown-up thing to do. But life events—like getting married or having a baby—aren’t reasons alone to buy a home.

The time is right when the money is right. Nothing can sour your dream of home ownership quicker than a major disaster you don’t have the cash to cover. So, before you even try to find out how much house you can afford, determine if you’re actually financially ready to buy a home. Start by asking yourself these questions:

  • Am I debt-free with three to six months of expenses in an emergency fund?
  • Can I make at least a 10% (preferably a 20%) down payment?
  • Do I have enough cash to cover closing costs and moving expenses?
  • Is the house payment 25% or less of my monthly take-home pay?
  • Can I afford to take out a 15-year fixed-rate mortgage?
  • Can I afford ongoing maintenance and utilities for this home?

If you answered no to any of the above questions, now may not be the right time to buy a home. It’s best to put your home purchase on hold and focus on your finances until you can answer yes to all six questions.

Just married? Wait at least a year before buying a home—even if your finances are in order. Don’t add the stress of a home purchase to a brand-new marriage, and never buy real estate with anyone you’re not married to.

New baby? Realistically, brand-new babies don’t need much room at all. It’s usually all of their stuff that’s the problem. Try to push through until you can reach your financial goals instead of purchasing a home on a tight—and emotionally-charged—deadline. Now that your kids are in the picture, it’s more important than ever to make the right choices that will affect their future. 

Step 2: Get the Right Real Estate Agent!

Though your search for homes may start online, it shouldn’t end there. You can do a lot of research on your own, but you need the help of an expert when it comes to actually finding and securing your perfect home.

A buyer’s agent can help you navigate through the home-buying process. In some cases, they may even be able to help you find a house before it hits the market, giving you a competitive edge. And when it comes to making an offer, your agent will negotiate on your behalf so that you don’t pay a penny more than you have to.
How does a buyer’s agent get paid? In most cases, the seller pays your real estate agent’s fees, so using a buyer’s agent is free to you.

What should you look for in a buyer’s agent? You may know a lot of real estate agents in your area. But keep in mind that not all agents bring the same knowledge and experience to the table. You want an expert who can show you how to buy a home! A true rock star will have the following: 

  • Specific experience assisting home buyers like you
  • Full-time real estate experience for at least two years
  • Great communication skills
  • A super-serving attitude that makes you feel like you’re their only client
  • An impressively long list of homes sold every year
  • Exceptional experience in your local market

A true pro won’t shy away from tough questions. They’ll be a mover and a shaker, ready to fight for your best interests as you search for the right house and negotiate the terms of the contract. As a home buyer, working with a rock-star agent is one of the biggest advantages you can give yourselfContact one of our agents today!

Step 3: Maximize Your Down Payment

The best way to buy a home is with 100% cash down or as close as you can get to it. Keep in mind the more cash you put down, the less money you’ll need to finance. That means lower mortgage payments each month and a faster timeline to pay off your home loan! Just imagine a home with zero payments! 

If you can’t postpone until you can pay cash, putting 20% down will keep you from paying private mortgage insurance (PMI). PMI protects the mortgage company in the event you don’t make your payments and they have to foreclose on you. It usually costs 1% of the total loan value and that cost is added to your monthly payment.

Related: Want to learn more about how to save up a down payment on a house fast? Our 5-Day Home Buyer Savings Plan will help you discover simple tricks to save a five-figure down payment by this time next year!

Step 4: Get Preapproved for a Mortgage

In just a quick conversation with you about your income, assets and down payment, a lender can prequalify you to buy a house. Getting preapproved takes a little more work—a lender will need to verify your financial information and submit your loan for preliminary underwriting. Although it takes some extra time to get preapproved, it pays off when you begin your home search since a preapproval letter shows that you’re a serious buyer.

A word of caution: Your mortgage lender will most likely approve you for a bigger mortgage than you can actually afford. Do not let your lender set your home-buying budget.Ignore the bank’s numbers and stick with your own.

How do you know which mortgage option is right for you?

Bad financing can turn your biggest asset into a liability. That’s why getting the right mortgage is so important! Setting your boundaries on the front end makes it easier to find a home you love that’s in your budget.

Here are the guidelines we recommend:

  • A fixed-rate conventional loan. With this option, your interest rate is secure for the life of the loan, leaving you protected from rising rates. Any other mortgage option is a terrible idea.
  • A 15-year term. Your mortgage payment will be higher with a 15-year term, but you’ll knock out your mortgage in half the time and save thousands in interest.
  • A monthly payment that’s no more than 25% of your monthly take-home pay. This leaves plenty of room in your budget to achieve other goals like saving for retirement or putting money aside for your kid’s college fund. 

Step 5: Calculate the Costs

You can figure out how to buy a home that won’t bust your budget by simply crunching a few numbers. Once you know how much you can realistically spend on a new home, make sure you and your spouse are on the same page about your budget and what you can actually pay!

  • Add up any income you bring in each month. Let’s say you bring home $2,400 a month and your spouse makes $2,600 a month. Your total monthly take-home pay would be $5,000.
  • Multiply your monthly take-home pay by 25% to get your maximum mortgage payment. If you bring home $5,000 a month, that means your house payment should be no more than $1,250 a month, including taxes and insurance.

Use our free mortgage calculator to determine your home-buying budget. Be sure to factor your down payment into the equation and include a buffer in your 25% for taxes and insurance, which are typically included in your monthly mortgage payment. For example, let’s say your maximum monthly payment is $1,250, you have $25,000 for a down payment, and taxes and insurance will cost about $200 a month. That means you could afford a $172,000 house on a 15-year fixed-rate mortgage at 3.5% interest.

  • Factor in homeownership costs. Your emergency fund can cover major home disasters. But if live in a neighborhood that has home owner association fees, or if you want to save up for a few home upgrades, you’ll need to build room in your monthly budget for those expenses. Just be sure they don’t take away from bigger financial goals, like saving for retirement.

Leave room in your monthly budget to cover other homeownership expenses. These costs may include:

  • Utilities
  • Ongoing maintenance and repairs
  • Furniture and décor
  • Don’t forget moving and other expenses. Moving expenses can vary from hundreds to thousands of dollars depending on how much you’re moving and how far away your new home is from your current place. You can call moving companies in your area for quotes ahead of time to help with budgeting.

The Next Steps

One of the best places to start your house hunt is our mortgage calculator. That way, you get a better idea of what you can afford.

Next, talk with a professional agent about your financial goals so they can help you find a home that fits your budget. Dave’s real estate Endorsed Local Providers (ELPs) understand how important it is to you to buy a home you can afford, so you can trust that your ELP won’t pressure you to consider homes that would bust your budget. 

Let us help you find your ELP today!

 

How to Buy a House You Love at a Price You Can Afford

Want to know the secret to home affordability? Work with an experienced real estate agent. They’ll help you get a great deal on the house you love. A good buyer’s agent fights for your best interest every step of the way so you don’t pay a penny more than you have to.

If you’re looking for a local real estate agent who will offer you the same trustworthy advice no matter your budget, give Dave’s real estate Endorsed Local Providers (ELPs) a try. Our ELPs understand the financial path you’re on and won’t push you to overspend on a house just so they can bring home a bigger commission check.

We only endorse the top agents in your area, so you can trust your ELP to negotiate the best deal on the home that’s right for you. Connect with a local real estate agent today!

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