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Shopping for and purchasing a new home is a big adventure. Being a homeowner has so many benefits — from being able to enjoy your own space to making an investment that is likely to pay off in the future. Many homebuyers have big plans for their new homes and begin by assessing their needs for space. In addition to the needs of the household, one of the considerations a homebuyer should make from the start is affordability.
While you are taking this big step, it’s important to know what price range of house you can afford. A home not only provides a sense of physical security; it should also come with a sense of financial security. You will want to go into your home buying journey knowing exactly how much home you can afford.
There are a number of factors that go into determining what price of house you can afford. These factors can include your:
It’s wise to consult a lender when you’re serious about buying a new home. Lending professionals can help determine how much of a home you can afford and provide you with mortgage preapproval if you qualify. The preapproval is for a home loan up to a certain amount. Knowing what you can afford before you begin home shopping can be a big time saver. A new home builder may also be able help you with this.
You can get some idea about the house payment you can afford by beginning with the end in mind. That is, if you’re planning to finance your home instead of paying all cash, you can calculate your potential monthly payment at the beginning of your search.
List out your monthly expenses, including debts, and subtract your expenses from your monthly income. Remove your current housing costs from the calculation. The resulting number represents the space you have in your budget for the monthly payment on your new home. You can also budget for a new home.
Once you have calculated your possible monthly payment based on your current budget, plug that number into a handy online calculator. There are many calculators online that calculate the price of a home based on the factors you enter, including location, monthly debt, credit score, down payment amount, and ideal monthly payment. A simple internet search will turn up a number of calculators.
The 36% rule is a guideline to use when determining how expensive a home you can afford. This common wisdom says that your total debt payments, including your projected mortgage, property taxes, and homeowner’s insurance, plus all other debt payments such as credit cards, auto loans, and student loans, should never add up to more than 36% of your gross (total before taxes) income. This is a good rule of thumb to use when calculating your future mortgage payment.
You can use the 28% rule to take it even further. This guideline agrees that your total debt payments should be 36% or less of your gross income. It also states that house payments alone should be less than 28% of your total debts in order to leave room for other debt payments.
There are several different loan types homebuyers may consider when mortgaging a home. These options offer different terms on payment amounts and interest rates. The type of loan you have will certainly affect the amount of your mortgage payment.
You can speak with a lender about loan options that may be appropriate for you. There may be other options available to you, but FHA loans through the Federal Housing Administration or VA loans through Veterans Affairs are a few common types.
This mortgage type is insured by the U.S. Federal Housing Administration and, with the right credit score, may allow a down payment amount of less than 3.5% of your total purchase price.
If you are or were in the military, or have a close military connection, you may be able to qualify for a VA Loan administered by the U.S. Department of Veterans Affairs. One of the benefits is that this type of loan may not require a down payment.
When you begin your homebuying journey, you may want to consider saving your first step. In fact, it is advisable to save as much as a year’s salary before you begin shopping. This not only means you have cash on hand, but savings also assures lenders that you may have money left over after the purchase of your home. This may help in the process of obtaining a mortgage. It will also offer you peace of mind.
In addition, explore different types of home in your home search. The “amount” of house you can afford may surprise you when you compare costs on resale homes and new construction homes. Many options exist today for buying new construction homes or new homes that are move-in ready.
While you are shopping around, also consider homes that won’t max out your budget to leave yourself some financial breathing room. You may have an easier time making payments on your house with that wiggle room. And, you may have some extra cash on hand for regular maintenance and any upgrades you’d like to make.
If you're ready to start your home search, we're here to help. When you're in the market for a new home, check out Brookfield Residential communities. You can search for beautiful new homes throughout the U.S. to find your dream home. Let us know today how we can help you find your new dream home.