Finding Homes within Your Budget
One of the biggest factors in finding your next home will be how much money you have for a down payment, and how much you can afford every month as a mortgage payment. Other parts of the equation include your credit history, the interest rate you get from the lender, your work history, and any other debt you have. Before you look at a single home, it is a good idea to have as much information on these items as possible, so that you do not waste too much time looking at homes that are outside of your budget.
What’s your down payment?
First question - how much money do you have for a down payment? Take photocopies of your most recent brokerage and bank statements, and jot down how much cash you have saved for a down payment. Lenders typically do not like to see that you completely drain all of your savings for a down payment, so you may need to set aside money equal to 3-6 months of your household income.
Secondly, what percent of the total purchase price is that down payment going to represent? For example, if you have set aside $40,000 for a down payment, and you are going to buy a $200,000 home, your down payment is $40,000 divided by $200,000, or 20%. Twenty percent is the most typical down payment amount, but down payments have ranged from zero all the way up to 100%!
What can you pay monthly?
Typically, lenders like to see that your mortgage payment is less than 28% of your gross monthly income. So if you earn $5,000 per month, the maximum mortgage payment would be $1,400. Historically, this has been the rule-of-thumb; because of the recent run-up in home prices, there have been lots of exceptions to this rule in the last few years. Additionally, your monthly debt payments on things like cars and credit cards should be less than a third of your monthly gross income. Your lender will have better knowledge of your local market conditions, so make sure to ask.
Ultimately, the down payment influences the mortgage rate and amount, and vice-versa. TotalMove offers a suite of calculators to help you crunch some of these numbers. Additionally, any lender or mortgage broker will be happy to work with you to explore your options.
Once you have determined your down payment, a monthly payment amount, and a mortgage that you qualify for and can accommodate the first two, you can determine a range of home prices you can afford. Again, the TotalMove calculators can help you figure this out. The bottom end of the price range is easy – “as low as possible,” but the other end – the most you can afford is probably the more important number, since most people tend to “stretch” to buy as much house as they can afford.
So how much house can you buy with that?
You probably also have a minimum expectation on house size – “I need at least three bedrooms, two bathrooms, and a family room.” Now’s a good time to put your agent to work. Tell your agent your budget constraints, and see what recommendations he or she has. Suggestions might range from different towns and neighborhoods to different property types, e.g., considering a condo or townhouse instead of a single family home.
But it is also a good idea to not just rely on your agent. Do your own homework - research homes for sale on the web, visit open homes, and explore new towns or neighborhoods that may accommodate your budget constraints.
It may be a challenging task, but when you are all done the reward of home ownership more than makes up for the effort. Good luck on your hunt!