It can be hard to know what your budget is when buying a home, but there are a few tips and tricks that can help make knowing how much house you can afford easier.
1. Figure out your monthly income.
If you are paying for a home with a partner make sure and include their income in your total. This includes all forms of revenue streams from different investments to a set salary.
2. Calculate all housing costs.
Estimate your total down payment amount and how much your monthly mortgage payment will be. What makes up the different components of a mortgage payment are:
Principal: the amount of money you borrowed and have to pay back.
Interest: the cost you pay for borrowing money. The amount and percentages vary.
Taxes: are the property assessments collected by your local government. Often a portion of your taxes is taken out every month with your mortgage payment and is held in an escrow account until they are due.
Insurance: covers losses and damages if something happens to the owner’s property. Similar to taxes, insurance payments are often held in an escrow account, and then paid on your behalf to the insurance company.
All of these components will also depend on how long your loan is. The most common homeowner loan is 30 years.
3. Tally up all other living expenses.
This includes all the money that goes out every month. Make sure to estimate accurately because this is a large factor. Subtract this amount from your monthly income. The number left will give you an idea of how much house you can afford. Read our past blog on online banking to learn about some good budgeting apps to help with this process.
4. Follow the 28/36% rule.
A good rule of thumb to follow is the 28/36% rule. This rule states that you should not spend more than 28 percent of your gross income on housing, and no more than 36 percent on total debt. Total debt includes things like car and credit card payments along with student loans.
Tip: To determine how much 28 percent of your income is, multiply your monthly income by 28. If your monthly income is $7,000 for example, your equation should look like this: 7,000 x 28 = 196,000. Now, divide that total by 100. 196,000 ÷ 100 = 1,960. Your monthly income to spend on housing would be a maximum of $1,960.
By following these tips you should find yourself with the basic knowledge and understanding of what you can and cannot afford when looking to buy a house.
Apply for a home loan at Voyage Federal Credit Union today or contact us with any questions by calling 605.338.2533.