A lot of home buying focuses on your mortgage, but there are a ton of hidden costs you might not consider when you first start shopping around. Add those in, and you might have to narrow your search to more inexpensive offerings.
So, Stygian Blue wants to know, how much house can you really afford?
How do you really know how much house you can afford? My wife and I are looking to buy a house in the next year or two, but we’re concerned about hidden costs. Calculating the mortgage payment is easy; three minutes in Excel gets you that info. But what about the actual property tax? Or the fact that a house probably costs more to heat/cool than an apartment? How much should you set aside for emergency repairs that you don’t have to worry about when you’re simply renting? What about closing costs, which apparently can run in the five figures now?
Basically, we think we can afford a house that costs a certain amount, but we’re afraid of ending up “house poor.” HELP!
Mat Ishbia, president and CEO of Wholesale Mortgage, says a quick, “back of the envelope” calculation is three times your and your spouse’s combined income. So, if you each make $60,000, your house should cost $360,000 max.
But he says a better way is consulting with an expert who can lay out all of the costs for you and help you compare options.
You can do some of that on your own. First, calculate your mortgage cost. You can use this mortgage calculator, which includes things like homeowners insurance and property taxes (click “Advanced”).
If you put less than 20 percent down, you’ll also want to add in the cost of private mortgage insurance. This varies depending on where you live and the home you buy, but you can get an estimate by calling an insurance provider or two.
Also be aware of limits on lenders. Typically, “lenders can’t approve mortgages that would take up more than 36 percent of your monthly income,” says Erin Lantz, VP and GM of Mortgages for Trulia. “Many lenders tend to stick with even more stringent requirements, limiting a mortgage payment to 28 percent of a borrower’s monthly income if a borrower’s credit scores, employment, and income aren’t solid.” It’s known as the 28/36 rule, though not everyone abides by it. Sticking to the 28 percent figure, though, the max payment for the median American family (with a household income of $59,039) should be no more than $1,377.
That said, the math is never that simple. “Consider subtracting other essential expenses, such as child care or transportation costs, from your monthly income total,” says Lantz. “Your lender will also consider student loans, a car loan and credit card debt.” Your total debt-to-income ratio can’t exceed 36 percent, so you’ll want to get all of that in order before you start looking.
Ask lenders for a preapproval, which will give you an estimate of how much you’ll be able to borrow. To do this, you’ll need to get bank statements, pay stubs, tax returns and other documents in order. Then find areas that you can afford and neighborhoods you like. You can set up alerts on sites like Realtor.com, Zillow and Trulia for whenever a home in your area and on your budget hits the market.
In the meantime, you’ll also want to budget for one-time payments, like closing costs, legal fees, a house inspection, movers, etc. So, yes, it is expensive, and you’ll likely encounter surprise costs regardless, but with proper planning it’s manageable.