Buying a home is one of the most exciting moments of your life. It's your chance to finally realize the home of your dreams, complete with the bedrooms, kitchen, and style you've always hoped for. But amidst all the vision boards and scrolling for amenities like furniture and home gadgets, it can be easy to lose sight of how much home you can afford.
A monthly mortgage payment encompasses more than your base payment plus interest. Depending on how much you put down at closing, you may need to also incorporate costs like private mortgage insurance (PMI), as well as taxes. This blog breaks down how to determine how much house you can afford, as well as steps you can take to assess your budget and apply for pre-approval.
Before diving into the world of mortgages (or any loan, for that matter), look at where you currently stand with your finances. Now is the perfect time to develop a budget if you don't already have one, or to revisit it ahead of applying for a mortgage. Take a step back and review your monthly financial obligations, including:
Don't leave any payment you routinely make off the table. Review your statements from the last month or two for both your debit and credit cards to ensure you have every payment covered. Keep this number on hand and use it as your starting point. A budget is exactly where you need to start and contains the numbers you need to determine how much house you can afford.
Once you begin doing research into buying a home and determining what you can afford, you'll likely come across the 28/26 Rule. Simply put, the 28/36 Rule is a guideline that lenders use which states you should spend no more than 28% of your gross (pre-tax) monthly income on housing, and no more than 36% of your gross monthly income on debts combined (including a mortgage or housing). The 28/36 Rule isn't a rule that's required by every lender; rather, it's a good benchmark to see if buying a home is something that can fit comfortably in your current lifestyle.
Let's say your monthly gross income is $4,000. You would multiply this number by .28 to gain an idea on roughly how much you should aim to pay each month in your mortgage. To compare this number to the rest of your monthly obligations and debts, multiply it by .36. In this example, you'd want to spend no more than $1,120 each month towards your mortgage, and no more than $1,440 in total towards your debts each month.
While a mortgage payment may seem like the flat fee you need to pay each month for your home, there are several different components that make up a mortgage payment. Some of the most common elements of a mortgage payment include:
Mortgage payments will vary greatly from borrower to borrower depending on a variety of factors. For instance, someone who needs PMI would need to factor that into their payment. Additionally, interest rates for mortgages can vary over time and change depending on market factors.
Down payments are another major factor you need to consider when it comes to buying a home. Certain mortgages may have requirements about how much you need to put down, while others may allow you to put down as little as 0%. For instance, a VA loan allows military service members, veterans, and eligible surviving spouses to put in a 0% down payment.
If you aren't eligible for this kind of program, you may lean towards a conventional mortgage. It's a common myth that you need to pay 20% for a down payment. While this is an excellent goal to strive for, it's not required and shouldn't hold you back from qualifying for a mortgage in most cases. Speak with your lender to review your eligibility for any programs and determine a down payment that you're comfortable with.
While buying a home is a tremendous accomplishment, the costs unfortunately don't end with your monthly mortgage payment. As a homeowner, you'll need to pay utility bills, HOA fees (if they apply to your home), and any costs that may crop up for repairs or maintenance. Being a homeowner is an achievement, but it's not without its fair share of challenges!
There's no set rule you should follow when it comes to factoring in these unexpected costs. A good rule of thumb would be to put money aside into an emergency fund which you can turn to for any repair or maintenance costs. Consider this when deciding how much money you want to put forward in your home's down payment.
Once you've mapped out your budget and are serious and ready to buy a home, it's a great idea to apply for a mortgage pre-approval. A mortgage pre-approval determines how much you're eligible to borrow to buy a home. In other words, it defines how much you're allowed to borrow from a lender and gives a framework for the price range you should be searching within.
A mortgage pre-approval is also a critical tool you can use when applying for a mortgage with your lender. It's tangible proof that you're serious about buying a home and are aware of your limits. You can apply for a free1 mortgage pre-approval with American Heritage, whose mortgage team is ready and excited to help you in every step of your homebuying journey. Learn more and apply here.
If you need some assistance in determining how much house you can afford, mortgage calculators are an excellent tool you can use. Most calculators are free, and you enter in details like your monthly income, obligations (auto loans, credit cards, etc.), mortgage rate, and more to get an idea of what you can afford. American Heritage's Mortgage Qualifier calculator is a free resource you can use to find this information out for yourself! Try this calculator tool here.
1All loans are subject to credit qualification, credit worthiness and other factors. All rates, promotions and offers are subject to change without notice.