Buying your first home is a very exciting prospect. That’s until you take a peek at your budget and then the idea of purchasing a property might not seem so tempting after all. You can let your imagination run wild for a while, but sooner or later you have to look at the numbers, because it all comes down to money in the end.
We all have an idea of how our dream home should be, from the number of rooms it should have to the way the outdoor space should look and every single detail in between. If only one could turn these ideas into reality through thought power alone. But unfortunately we have to find more realistic ways to deal with things. The harsh truth is that many house hunting dreams are cut short due to financial issues.
People often overestimate their financial capabilities and that can lead to serious problems. If you don’t have a budget to back up your dreams and you don’t know how to manage your money properly, you might want to postpone purchasing a house for a while. At least until you gain a better understanding of how house buying works and how much house you can afford. Because there’s a big difference between what you can buy and what you can afford. Feeling a bit confused? We’ll break things down for you and show you how you can determine if you can afford a house or not.
The golden rule of house buying
Not a lot of buyers have the budget to buy a house outright so they resort to the next best thing which is taking out a mortgage. But one must do it the right way. The golden rule of house buying says that future home owners shouldn’t spend more than 28% of their gross monthly income on mortgage, and most financial experts would advise you to follow this rule. That means you must know your numbers before making any hasty decisions. You should know exactly how much money is coming in to see if you’re able to follow the 28% rule. Otherwise you might end up swimming in debt for a good part of your life.
Lenders such as Mortgage House provide online calculators to make things easier for borrowers and help them get an idea of how much money they could borrow. Although they don’t offer you any guarantee regarding mortgage approval, these tools can serve as a guide to get a clear picture of your borrowing power and mortgage possibilities. But even if your financial situation allows you to get approved for a mortgage, you should still look at the bigger picture and think about how the loan will affect your overall budget.
Think beyond the mortgage
Mortgage is a big part of the equation when looking to buy the house, but it’s not the only aspect you should focus on. Apart from mortgage payment, there are other costs to take into consideration. Monthly expenses should not be overlooked. The money you spend on utilities, repairs, insurance and upkeep might not seem like much when taken separately, but add them up and you’ll get an impressive amount, probably a sum much larger than what you imagined.
If you decide that cutting back on expenses would help, then by all means do that. Trimming unnecessary spending is always a good idea, but you must be realistic and understand that these changes might not be enough to get you the house you want. Once again, put all the numbers on paper and see what they tell you.
Consider your debt-to-income ratio
There are many variables that help a lender determine your eligibility for a home mortgage. Your debt-to-income ratio (DTI) is one of them. The DTI compares your monthly income to your monthly debt and it weighs heavily on the outcome. As you can imagine, the higher the DTI, the more difficult it will be to get approved for a loan, and if you do, chances are it won’t be at a good interest rate. Usually lenders will only consider a barrowers application if he has a DTI under 43%.
So what can you do if your DTI isn’t looking good? The obvious solution is to pay as much of your debts as possible before taking on any other financial responsibilities. Of course, this isn’t something you can achieve overnight, but it’s the most reasonable thing to do if you want to increase your chances of getting approved for a mortgage at a decent interest rate and be able to afford paying for a house.
Don’t forget about down payment
Another important factor in affordability matters is the down payment for the house. In most cases, lenders require home buyers to make a down payment of at least 20% of the house’s value, and that can represent an issue for a lot of people. You can still get approved for a loan even if you can’t make a down payment of 20%, but then you’ll probably have to factor private mortgage insurance (PMI) in the equation. That translates into higher monthly mortgage payments.
We advise you to choose the house that allows you to make a larger down payment, so you can pay less interest and have smaller monthly mortgage payments to deal with.
The house you want vs. the house you need
The things people want and the things they truly need aren’t always the same, and this also applies to home buying. Maybe you want a big villa with enough rooms to get lost inside, but if you don’t have a numerous family and you don’t have a big budget either, there’s not much point to making such an investment. Similarly, if you’re tempted by the idea of buying a cheap fixer upper, but you’re not aware of the amount of effort and money that are required to turn it into your dream home, it might be best to take a safer route. Focus on your actual needs before you take the leap and listen to the voice of reason when you make such an important decision.