How Much Home Can I Afford?
As any experienced buyer or real estate agent will tell you, buying a home is a multifaceted process. You're choosing somewhere to live, but you're also making what will probably be your biggest purchase in your entire life. Because there are so many financial considerations, it's important to approach the process carefully and systematically. You want to be sure that you don't miss anything!
A Few General Observations
Before we delve into the specifics of home financing, here are a few general observations.
- You should only buy a house if you plan on living there for at least five years. If you live somewhere for less than five years, renting may be a cheaper option. If you live somewhere for five years or more, though, buying is often more cost-effective.
- Bigger down payments mean a smaller loan amount and (consequently) smaller monthly payments.
- Your mortgage payment will only be a fraction of your monthly expenses. As the owner, you will also be required to pay for utilities, landscaping, and any maintenance or repairs.
Keeping these points in mind will help you get a more accurate idea of the entire financial process. In addition to a down payment, you should have some money set aside to cover the upfront costs associated with buying a home (appraisal and inspection fees, closing costs, etc). You should also be prepared to cover the other expenses associated with owning a home.
When you buy a house, you will most likely be making the biggest purchase of your life. However, you are not the one spending the money outright. Your mortgage lender is the one making the initial purchase, with the agreement that you will pay them back over the course of fifteen, twenty, or thirty years. Because they are the ones making the initial investment, lenders want to be confident that buyers will be able to pay them back as promised.
In order to protect their investments, lenders will approve each buyer for a specific loan amount on a case-by-case basis. Having good credit will help you get approved for higher loan amounts and lower interest rates, but that's not the only factor. Lenders are also closely examining your debt-to-income ratio - that is, how much of your monthly income is already committed to paying back other debt such as car loans, student loans, and credit card debt.
Most lenders operate by the 28/36 rule. This rule dictates that your mortgage payment should not exceed 28% of your monthly household income (before tax), and that your total monthly debt payments should not be greater than 36% of your monthly household income (before tax). You can determine these percentages by multiplying your gross monthly income by 0.28 or 0.36.
Down Payment & Other Expenses
As we mentioned earlier, your monthly mortgage payment is only one piece of the puzzle. As the homeowner, you will be required to cover all the utility bills, the cost of landscaping, upgrading, or remodeling, and the cost of making any necessary repairs. Depending on the type of loan you get, you may also be required to provide a down payment. The most conventional down payment is 20% of the home's total sale price, but some lenders are now touting a down payment option as low as 5%. If you qualify for a non-conventional loan, such as a VA loan or a USDA loan, you may even be able to qualify for a 0% down payment. Keep in mind, however, that money you don't provide as a down payment upfront is money that you will have to pay back later - with interest.
Thinking About Buying? Give Us A Call!
Don't let all of this information scare you! Buying a home is a big financial commitment, but it can be incredibly rewarding if approached correctly. If you are thinking about buying a house at the Lake of the Ozarks, or would simply like to learn more about the process, please don't hesitate to reach out to Devine & Associates Real Estate. We would be happy to help you!
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