Buying your own home is one of the most common ambitions of many Americans. Owning your own property has many fantastic benefits such as not having to worry about fluctuating rents or having to move at the whim of a landlord. You can also potentially use a spare room or annex as an income opportunity and will be able to build up equity. Not to mention the satisfaction and comfort you will get from truly owning your own family home.
But as you are beginning to plan your home buying process, you may have some questions about exactly how much you can afford to spend when buying a property. In the article below, we will look at the process to buying a house with a realistic budget and how you can discover the right mortgage price for your financial situation and lifestyle choices.
How many times my income can I afford when buying a house?
Fidelity Investments advises that the total value of the house you buy should not exceed 3-5 times your income. If you have debts that exceed 20%, you should aim for a house price that is no more than 3 times your total income; however, if you are debt-free, you can aim for a home that is 5 times as much.
There are several different mortgage calculators you can use online to get a sense of what a bank would offer you in the way of a mortgage. Checking some of these estimates may be some good first steps when buying a house to give yourself a general idea of the type of budget you can afford.
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What factors should I take into consideration when planning my home-buying budget?
Although Fidelity's advice above is a good rule of thumb for giving you a ballpark figure for budgets when buying a house, there are many different variables you will need to consider before coming up with your final budget. Below are some of the things you should consider when deciding upon your mortgage and house buying budget.
How Large is your Current Debt Level and How much does it Affect your Monthly Income?
If you currently have a substantial amount of debt, you should consider working to lower this before applying for your mortgage. Banks will take your current debt levels into account when deciding upon your mortgage interest rates, with your wallet taking the hit if they decide your current debts are too high.
Generally, your current household expenses should not be more than 28% of your combined monthly income. If you think your current debt repayments may drive up the interest on your mortgage or mean that you may have trouble making your mortgage payments in the future, you should perhaps consider holding back on planning to buy a house until you are in a stronger financial position.
What is your Current Credit Score?
Your current credit score will also affect your mortgage interest rate, so it is something you will need to take into account when estimating your house-buying budget. Your credit score will determine whether a bank views you as a viable candidate for a mortgage overall and an excellent credit score may mean you are given lower interest rates.
According to Rocket Mortgage, you should be aiming for a credit score of 620 if you are looking to get a mortgage. A worse score may result in higher interest rates, or the bank rejecting your application to buying a house entirely.
If you are uncertain about your current Credit Score, you can head to www.annualcreditreport.com to access your score for free. There are also several apps that you can use which will also advise you on the steps you can take to improve your score.
What are your Current Lifestyle and Leisure Outgoings?
You should also look at your current household budget and how much of your currently available cash are you willing to give up each month for your house payments. If you have a habit of dining out a lot, buying expensive clothes, and traveling frequently, you should consider how much the extra cost of a mortgage will curtail that. How much of your lifestyle are you willing to adjust to buy your new home?
If you still want to be able to take trips around the globe, do you need to consider adjusting your home-buying budget to reflect this? Can you give up a few amenities or requirements in the property so that you can maintain your current lifestyle habits?
Are you Eligible for an FHA Loan?
An FHA Loan may be available to you from the Federal Housing Association's government-backed program which aims to help first-time house buyers save money on the initial down payment for a home. Depending upon your eligibility, you may find that one of these loans allows you to make a down payment of only 3.5%.
Are there any Big Lifestyle Changes Looming which may Affect your Annual Income?
Think ahead to the next few years: are there any momentous changes you can see which may significantly affect your income level? Are you planning to start a family, go back to school, or set up your own company? These are all factors that need to be considered when coming up with your budget.
Your mortgage is a financial commitment that you will need to keep to for years, so you should consider how much you think you will be able to pay in the next decade and beyond when coming up with your overall house buying budget.
What are your current savings and how much do you want to be able to save in the future?
Saving up for a house is all well and good, but do you have any other savings you are looking to maintain in the future, such as retirement plans and college funds? You will need to factor in how much you can afford to pay for a mortgage before your ability to save for other important areas is affected.
Make sure you do your research and get quotes from several different mortgage providers.
In setting your budget, you should make sure to get quotes from several different providers. By getting quotes from at least five different mortgage companies, you could save approximately $3,000 on the loan overall. The more research you do, the better picture you will have of the mortgage rates that will be available to you and which fall within your optimum house-buying budget.
It is important to set an achievable and realistic home-buying budget.
As you can see, there are multiple different steps when buying a house that you will need to consider when coming up with an amount you can actually afford. It is easy to get overwhelmed and carried away with the excitement and possibility that comes with finally owning your own home.
But rather than considering the prospect of owning dream buildings that don't reflect your lifestyle or budget, you should make sure to sit down and carry out a full and detailed assessment of all aspects of your financial situation. This part of the home-buying process may not seem like fun, and you may be slightly disappointed by having to downsize your property requirements, but sound financial planning can only benefit you overall.
Summary - How much can I actually afford when buying a house?
There are many steps when buying a house, in terms of deciding how much you can actually afford. You will need to take into account not just your current budget, but your debts, credit score, lifestyle changes, and other life aims you will also want to be saving money towards.
House Buying is one of the biggest decisions you will make in your life and making sure that you set an affordable budget for this purchase will lessen the chance of stress, worry, and upset further down the road.
Five Ways to Save For A Down Payment
Saving enough money to buy a house might seem difficult. However, with a sound savings strategy, anybody can save enough for a down payment on the home of their dreams.