You have been saving and planning, and now it is finally time to start shopping for your first home! We are thrilled for you! Before you hit the real estate listings or start interviewing agents, you have a little math to do.
Math may not be your favorite subject but you need to know your budget before you start looking at houses.
If you have been wondering "How much mortgage can I afford?" this five-step guide will help you determine a budget so you can shop confidently.
You can only spend the money you make, so your income should be the basis of your calculation. Be sure to do this calculation before you fall in love with your dream home because it can drive your shopping process.
So how do you calculate this?
First, add up your monthly take-home pay in the household, including your significant other's income.
Next, multiply that amount by .25. This gives you the maximum you should pay monthly for your mortgage and associated costs.
Once you have that amount, use a mortgage calculator to determine a purchase price that works for you. You will need to know an approximate interest rate and how much you plan to use for your down payment. Remember to include the cost of your homeowner's insurance and property taxes to your monthly mortgage payment. By doing this calculation, you will have a good idea of how much you can afford to spend on your home.
PMI stands for private mortgage insurance. Most no-money or low-money-down home loans and mortgages charge this or a similar fee. This is an added fee you pay every month just for the privilege of borrowing money.
Does that sound like something you want to avoid? We think so!
So, what can you do to prevent PMI or similar charges? The key is a larger down payment.
For most home loans you need a loan-to-value (LTV) ratio of 80% or less to avoid PMI. This means your down payment needs to be about 20% to protect you from this cost. If you can't save 20% for your first mortgage and home purchase, save as much as you can. Once the LTV reaches 80%, the PMI is no longer necessary. The larger your down payment, the less time you'll be paying this cost
If all that you budget for is your mortgage, you may wind up feeling broke. Owning a home means many other expenses that should be factored into your budget. Increased utilities, property taxes, homeowner's insurance, and maintenance are all going to be your responsibility as a homeowner.
But don’t despair! These expenses do not have to be excessive. They just need to be considered when you are setting your home-buying budget. When you are asking, "how much house can I afford?" you must consider all of the costs, not just the mortgage payment.
You have done the hard work to determine your budget, but your real estate agent keeps showing you beautiful homes that are just outside of that budget...
Be clear with your agent about your budget, and make sure they are willing to respect it. Seeing homes you can't afford is a waste of time and can make you frustrated. Instead, focus on seeing only those that fit within your budget.
Finally, as you decide how much mortgage you can afford, do not forget about closing costs. Some of the money you have been setting aside for your down payment may need to be paid at closing.
You may find a home within your budget that requires some upgrades or updates. The shag carpet in the basement is just going to have to go before you move in, after all! Shopping at the lower end of your budget may give you more money for updated appliances or new floors before you move in. You’ll probably need some additional cash to help with the actual move.
Your home loan should be financially beneficial, not draining. By carefully considering what you can afford, you will set yourself up for success in finding a home that fits.
Are you ready to start the home-buying process? Peach State is ready to help you find the perfect mortgage to fit your needs. If you’re ready to start your pre-approval or would like to learn more about the home-buying process, contact our Mortgage Services Department by calling 770.580.6098!