Buying a house can be a terrifying challenge for first-timers, especially if they are not familiar with the preapproval process associated with getting a mortgage. It can be tempting to go check out every house on the market, but if you don’t know how much house you can afford, you may be setting yourself up for disappointment in the end. Here are some tips and tricks for determining your home buying budget.
Factors that Determine Your Budget
There are three very important things that you will need to consider when it comes to buying a house. First, and often most importantly, you will need to think about your income. Second, you will need to think about any outstanding debt that you might already have. Finally, you will need to come up with a down payment to show your financial responsibility, though the down payment you will be expected to pay will vary depending on the type of loan you ultimately choose.
Factor #1 – Your Income
Most lenders will tell you that the cost of the monthly mortgage payments can’t be greater than a specific percentage of your monthly income – usually around 26% to 30%. This means that someone who earns about $50,000 per year cannot have a mortgage payment that exceeds $1100 to $1200 depending on the lender’s requirement. This ensures that you will be able to comfortably make your payments and still handle any other financial obligations, such as food, utilities, and other expenses. When you know the maximum monthly payment, you can more easily discover the total budget for your mortgage.
Factor #2 – Your Existing Debts
Lenders will also look at the total of any outstanding debt you might owe. Most of the time, lenders will make sure that the total amount of all existing debts plus the amount of your new mortgage payment will not exceed a certain percentage of your income, which is somewhere between 38% and 43%, depending on the lender. As an example, in order to qualify using the same information as above, your monthly debt payments would need to be somewhere below about $550 a month.
Factor #3 – The Down Payment
The amount of your down payment will also play an important role in the amount of house you can afford. You should aim to save at least 20% of the total value of the house to pay out of your own pocket; most lenders are far more willing to lend 80% or less of the value. With a 20% down payment, your mortgage payments will be significantly smaller, which means your loan can be larger. With a lesser down payment, you will likely need to pay for PMI, or Private Mortgage Insurance, which will greatly increase your monthly mortgage payment and decrease the overall amount you will qualify to borrow.
By using the information found here along with a handy mortgage calculator, you should be able to determine a rough preapproval amount for yourself and your spouse. Bear in mind that this amount can be affected by still other factors not mentioned here, including your credit and the mortgage interest rate you are offered.