Realizing the dream of owning your own home hinges upon one nagging question: “How much house can I afford?” Nothing puts a damper on the excitement of owning your own place quite like being house poor — biting off more than you can chew, financially speaking. No, your home should be a place you go to decompress and leave the stress behind, not fret about making your mortgage payment.
Just an FYI, we highly recommend you check out Offerpad Home Loan’s handy Monthly Payment/Affordability Calculator — the rest of this guide will walk through the important considerations to be made at each step in the process.
Before you buy a new home, it helps to do a little research and settle on a comfortable price range — one that won’t hamstring you month-to-month. Here’s a little guide to get you started.
Consider your monthly income
How much money is your household bringing in on a monthly basis? This is the first thing you want to pin down before determining your price range. It doesn’t hurt to make yourself a spreadsheet to use as a visual aid.
After you’ve accounted for your monthly income, make a note of your outstanding debts; this ultimately limits your maximum available spending power. Do you have a car payment, student loan, or other monthly payment? Jot it down. The difference is roughly the dollar amount you have available to spend on your mortgage.
Now, the math bit. While there are no hard and fast rules here, as a general rule of thumb, Interest.com advises, “Monthly housing costs … shouldn’t exceed 28% of your monthly gross income.” Use a calculator to factor out 28% of your monthly gross income — per the advice here, you don’t want your monthly mortgage payment to exceed this figure.
Important caveat: this figure does not account for taxes/interest payments; that modifier will vary depending on the market and the details of your loan. Using a property tax calculator can give you a rough idea of how much may be tacked onto your mortgage per month. The general rule of thumb: leave some financial wiggle room for taxes, interest payments, and general household maintenance.
After you crunch the numbers, you may be surprised at how much you can technically afford, but keep in mind: this is the top of your budget, not necessarily the price range you want to target. Want more breathing room each month? Calculate scenarios that allow you to pay less than 1/3 of your gross monthly income under a typical 30-year fixed-rate mortgage.
Determine your down payment
Now that you have a good sense of what you can afford month-to-month, you’ll want to pin down your down payment; the amount you put down initially will greatly impact your monthly mortgage rate and whether you need to include PMI.
According to the Consumer Financial Protection Bureau, here’s a list of steps you should take to get a rough idea of the money you have available for a down payment:
- Add up your savings and investment statements.
- Allocate the funds you need for other saving goals, i.e. child’s tuition, home renovations, etc.
- Ensure you have an emergency fund set aside; it’s generally recommended you leave yourself enough cushion to cover 3-6 months of expenses.
The CFPB also adds, “Generally, the larger the down payment you are able to make, the lower the interest rate you will receive and the more likely you are to be approved. If you cannot make a down payment of 20%, lenders usually will require you to purchase private mortgage insurance (PMI) or obtain an FHA, VA, or USDA loan.” Keep in mind, while the advent of PMI can help you get into a home quicker, it also costs you additional interest over time. If you can’t put down 20% of the home you’re interested in, you may want to look elsewhere unless it checks a lot of boxes.
With any purchase of a home, there are common fees you’ll need to account for: the down payment, the inspection fee, appraisal fee, and closing costs; the market your future home is located will influence how these fees break down. Assuming you’re buying directly from Offerpad (great choice, by the way), we can help answer any questions you have about the process — we’re experts.
We know there’s a lot to consider when it comes to shopping for homes, but don’t let rain on your parade — the mental gymnastics are completely worth it in the end. If you’re dreaming about owning your own home or upgrading your existing space, our team is ready to step in and help you find the perfect landing spot. We’re ready when you are!
Offerpad Brokerage, LLC and Offerpad Home Loans, LLC supports Equal Housing Opportunity, NMLS ID 1697280.