If you’re wondering ‘how much can I afford for a home’? This is a question that many first-time homebuyers neglect to ask. Buying a home isn’t just about what you’ll pay for the house itself. There are up-front costs, closing costs, and ongoing homeowner expenses to consider as well.
It’s best to be aware of all these costs before you go house hunting. If you find your dream home you want to know that you can afford it before you put in an offer.
These financial tips will help you determine what home price you can afford.
Calculating how much you can borrow
Unless a wealthy aunt has left you a large inheritance, it’s safe to say you’ll need a mortgage to buy a home. Jump onto an online mortgage calculator and plug in some numbers to see how much you might be able to borrow.
It’s also a good idea to apply for mortgage pre-approval before you go house hunting, then you’ll know how much you can officially spend. A broker can help you with your application and what paperwork you’ll need. They can also shop around different banks for you to get various deals.
The amount of mortgage you can borrow and conditions can vary from bank to bank. One might be happy with your income and the down payment you have for a deposit; another might want you to reduce your credit card limit.
Your spending will also be scrutinized. Lenders typically feel more comfortable if you spend 28% or less of your income on housing costs (mortgage, taxes, insurance, etc.). As always it is a good idea to work with your lending and financial professionals to talk about your specific situation.
Costs that you need to pay upfront
Now you know how much money you have to play around with, you can go out and make an offer on a house you love. But once you’ve had an offer accepted, there will be upfront costs that you’ll need to pay, so you’ll need to factor these into your budget.
Mortgage application fees
When you choose a mortgage provider, they may charge you various fees upfront to complete your application; expect to pay fees for service, house appraisal, underwriting, and a credit report. These can also be paid at closing if the lender agrees.
To show the owner that you’re serious about buying their home, a deposit called ‘earnest money’ is usually paid. How much depends on the situation. If you’re the only bidder, then you might only have to pay $500 to $1,000. If there are multiple bidders, you may have to pay 2%-3% of the offer amount. Your real estate agent will be able to help you determine what is an appropriate amount.
Having a sizeable down payment, not only puts you in an excellent position to make an offer on a home, it can help lower your payments and interest rate. That said, your down payment is due at the closing time, so you need to make sure it’s accessible.
There is a list of closing costs to pay before you can own the house, and the amount can be slightly intimidating for a first-time homebuyer. But if your budget for 2% to 5% of the loan amount, then you’ll be on track. You may also be able to get an estimate from your lender in advance, so you know how much you’ll have to pay.
Closing costs can include but are not limited to:
- Mortgage application fees (see above)
- Mortgage points (option to pay a % of your loan to ‘buy down’ your interest rate)
- The first year of mortgage insurance premium
- Attorney's fees
- Property inspection / pest inspection fees
- Title insurance and title search
- Local recording office fees (varies by city/county/state).
Ongoing homeownership expenses
As well as your monthly mortgage payment, you need to take into account all the other costs of owning a home. These include:
- Homeowners insurance
- Housing Association Fee (if you own an apartment)
- Utilities (power, water, gas, internet, phone)
- Property taxes
- Repairs & maintenance.
Some of these are fixed annual or monthly costs, so you’ll be able to budget in advance. Others like ‘repairs & maintenance’ are unexpected expenses, so it’s best to set up an emergency fund so you can put money aside to cover these.
Now you’ve taken all these costs into account; you’ll be much more informed when asking yourself "How much can I afford?" for your first home. Happy house hunting!