Tuesday January 19, 2016
If you’re a first-time home buyer, you may be struggling with how much of a mortgage you can realistically take on. When looking for apartments to rent, it’s easy to say that for the next year you’ll be able to afford your quoted rent, but a mortgage term is much longer. Before you start looking at potential homes to purchase, make sure you fully understand just how much house you can afford.
Guide for First Time Home Buyers
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How Much House Can You Afford?
Calculate Your Gross Household Income
The first step in any budget planning is to determine how much money is coming in. When you apply for a mortgage, the lending company will be looking at your gross income, which is how much money you make before taxes or other miscellaneous deductions are taken out. Add up the total gross income from all sources of employment for all applicants that will be listed on the mortgage to calculate your total gross income. For example, if you and your spouse are both applying for a mortgage, and each work one job where you earn $2,500 per month before taxes, then your total monthly gross income will be $5,000.
Follow the Rule of 28%
The lending companies will be evaluating your mortgage payment as a percentage of your gross income, so that’s where you’ll want to begin as well. While it’s possible to obtain mortgages from financial institutions that account for up to 45% of your gross income, most investing experts recommend that this figure not exceed 28%. So in the case that your total gross income is $5,000, an ideal monthly mortgage payment would be at or below $1,400 per month, as this is 28% of the total income.
Remember to Include ALL Housing-related Costs in the Mortgage Payment
Something to keep in mind when purchasing your first home is that your monthly payments are made up of more than just the monthly mortgage payment; purchasing a home always comes with additional costs. When you are planning out your budget, don’t forget to include any secondary costs for which you’ll be responsible, including things such as HOA fees, property taxes and mortgage insurance. These should all be included in the 28% mortgage payment determination, as they are regular expenses that you’ll be responsible for.
Add Up All Of Your Other Debts and Liabilities
Lenders will take your other debts into account as well, so you can be proactive by keeping a list of all your financial obligations and adjusting your home cost accordingly. It is wise to keep your total debt percentage (including housing costs, credit card debt, student loans, car payments, etc.) according to your income to around 33%. If you carry a significantly higher portion of other debts, you may need to reevaluate how much you will be able to spend on a mortgage payment.
Smith Douglas Homes is a trusted home builder in the Greater Atlanta Area as well as Raleigh and Birmingham. Our New Home Specialists are ready to help you begin the process of purchasing your first home, so contact us today to start your home search.