As a recent first-time homebuyer and a (elder) millennial who was sick of getting told, “why are you still renting, buy a house,” I know how intimidating it can be to wade into the waters of home buying. The dollar signs are big and the decision is one you’re going to live with for a long time. Despite that, the stats show the percentage of first-time homebuyers is rising and made up a record share of new mortgages this year. With so many new homebuyers entering the market, it’s crucial to consider the most important question of the home buying process: how much house can I afford? Here are four questions to ask to help you find that number.
How much money do you have saved for a down payment?
If you have been saving or have money from relatives that you have stored away, awesome! If not, start that savings account now. While many mortgages allow for down payments as low as 3%, the more you have for your down payment, the lower your mortgage payment is going to be. Generally, if you pay less than a 20% down payment, you will have to pay mortgage insurance until you reach that point, meaning more money out of your pocket.
What is your credit score?
Your credit score is going to first determine whether you qualify for a home loan and then determine the interest rate you are offered. When preparing to buy a home, the first thing you should do is pull your credit.
How much debt do you have?
Lenders are going to look at your debt-to-income ratio to determine whether you qualify for a loan, and it can also help you understand how much you can afford. For those reasons, you should know that number going in. Add up all your debt and divide it by your gross income. Generally, the maximum debt-to-income ratio is 43%.
Does your budget include repair costs?
You’ll also want to make sure you have room in your budget for the inevitable home repairs that will pop up. Many first-time homebuyers forget to include this when determining their home shopping budget—don’t do it! Repairs are no joke and if you aren’t prepared they can lead to stressful times and poor financial decisions. The rule of thumb is to include 1% of the home price for repairs each year. Check out Apprisen’s Home Replacement Costs Worksheet for average home repair costs.
Once you know those numbers, use a home affordability calculator to help you determine how much house you can afford. When you get that number, double check with your budget to ensure the mortgage payment fits into your unique spending plan.
Throughout the process, let your budget be your guide. Many times lenders numbers will show that you can afford more than you may be comfortable with. Trust yourself and your budget. Happy home buying!