Everyone’s jumping on the buy a home bandwagon now that mortgage rates are at an all time historical low. Can you afford to buy a home? You’ve been waiting for the announcement of low mortgage rates. After hearing about friends and family members paying 6% and up to 13% mortgage rates back in the hey day, you now wonder if you can afford to buy a home. Good question. You’re off to a good start. If you find that your rents have been increasing steadily and you’ve finally realized that it’s actually more affordable to purchase a home, then yes it’s time to buy. But wait, not so fast there. Let’s first get some of the costs of homeownership out of the way and sort out your personal finances.
I may not be popular for sharing the truth with you, however I feel it’s the responsible thing any realtor, broker and/or mortgage broker would review with you. So before we discuss if you can afford to buy a home, let’s get through home basics 101.
True Costs of Buying a Home, Can you Afford to Buy a Home?
1. Budgeting and Personal Finance
Don’t be unhappy with this one. You’ve heard the financial planners on the radio/tv/podcasts preach this all day long. You must first set a budget of your monthly expenses and income. Income is your net income and your expenses include any recurring monthly payments such as student loans, car payments, health insurance, credit card payments and etc.
TIP: if you have any of the above recurring payments, I’d encourage you to get on a budget and slay those payments to zilch. Truly. Buying a home is a MAJOR expense so clear up your other debts first.
2. Credit History
Let’s start with this one, if you’re going to attempt to obtain a mortgage, you’ll need a good credit history. Lenders are looking for how you pay. Are you late with payments or have maxed out your credit lines? Get those managed and stay current and on time. Be sure to obtain a copy of your FREE credit report and or credit score at MyFico to straighten out any incorrect deficiencies and determine your credit score as seen by lenders. Fico Credit scores range from 300-850 and lenders reward those with excellent credit with the better mortgage rates. It definitely pays to know your score before you reach out to your lender.
3. Down Payment Amounts
Think of this as your own deposit or instant equity on your new home purchase. Your downpayment correlates to how much mortgage you would be qualified for by your lender AND naturally the higher the downpayment, the lower your monthly mortgage. Why is that? Essentially it’s because you’re borrowing less. Some home buyers place anywhere from 5% to 20% and others up to 50% if they are buying into a Co-op the Co-op board may have established their own criteria.
4. Private Mortgage Insurance
Let’s say you don’t have 20% to place as a downpayment, then lenders will want an “insurance policy” A.K.A. charge you an additionally mortgage premium. Why do they do this? Think of it this way, lenders need assurance by way of insurance in case you default on your mortgage payments.
5. Property Taxes
Annual property taxes are factored into your monthly payments and depending on what state you’re in, it can represent a sizable percentage of your overall monthly costs. Don’t forget this one!
6. Homeowner’s Insurance
Homeowner’s insurance is mandatory by your mortgage lender yet it also protects your home too. God forbid a tree strikes your roof and you need to rebuild then you file a claim through your home owner insurance.
7. Home Maintenance Costs
Often times, home owners assume their monthly mortgage is the only recurring payment yet that would be a non truth. Truth is you’ll have a water bill, utility bill and long term expenses for managing your home. Your major appliances, furnace, heating/cooling and exterior of home such as the roof, gutters, exterior siding, masonry steps and etc. may need repairs or replacements in the near or distant future. Additionally if you’re in a seasonal state that is prone to snow in the winters and require landscaping for the remaining months, then factor in snow removal and landscaping maintenance costs unless you’ll manage it yourself. If you do, be sure to budget the purchase of lawn mowers, snow removers, supplies, rakes, shovels etc.
Remember earlier I mentioned creating a monthly budget? Add #7 for home maintenance costs to the equation. After you’ve sorted that out and budgeted for retirement saving, social life bucket, and any other important milestones that matter to you, then and only then can you really dig into these mortgage calculators to see just how much you can afford to buy a home. Using a mortgage calculator for the state of New Jersey is a good start even if you’re from a different state. The next step is speaking with a mortgage lender and ask them key questions.
TIP: What you need to know about how much a mortgage lender will lend you: (1) Principal, Interest, Taxes and Insurance (PITI) should NOT exceed 25-28% of GROSS income (2) PITI plus recurring debt should not exceed 33-36% of GROSS income.
Having written all that, let me just reinforce something. You are buying a home and no one else. Sure perhaps you’re buying it with a friend or spouse but you alone are paying the mortgage. Not your other friends or family. Everyone else will have their set of opinions but again you’re contracted to the loan obligations. So while Aunt So & So may encourage you to go for the more expensive home because you’re gainfully employed today, just consider the what if scenarios. Options: keep them all open and within your budget.
In a nut shell, I hope that helps and for a general idea of how much home you can afford, use either mortgage calculator or reach out to me to discuss your situation further.
All inquiries are confidential.