By Dawn M. Smith, MilitaryByOwner
It’s so much fun! Scrolling homes for sale, that is. Admiring photos of pristine white kitchens, envisioning yourself floating in a high-end backyard oasis pool, and mentally reconfiguring the master closet to add an island. These visions of grandeur, they’re all part of the home shopping process.
After all, you’re buying a dream, right? Eh. Perhaps. But, maybe your next home purchase is a “just for this PCS and rent it out later purchase.” These are two very different situations (in addition to several other reasons to buy) and require different mindsets as to how much home to buy. Deciding on the price of a home to buy really comes down to how much money you can convince a bank to loan you and if you’d like to spend all that they offer.
Check out these guidelines for help deciding how much to spend on your next home:
Calculate Your Current Costs and Debts
If you’re looking to buy property quickly, many factors will have already been decided for you or by you, even if you didn’t realize it. Your income and debt are two of the major aspects of homeownership that decide how much money a bank will lend you and at what interest rate.
You’ll have to sit down and really comb through each of your expenses. From cell phone bills to rent payments, each takes a piece of income away from the amount you can pay toward a mortgage. By obtaining a solid estimate of your debt-to-income ratio, you’ll have a better idea of what you can afford and about how much a bank will lend you.
Using a BAH figure is a fine place to start conceptualizing just how much money is available to you to spend toward a mortgage payment every month, but it’s not the only number to consider, especially if you’re already paying beyond your allotment to meet the rent in your current house.
Another figure to consider is the 36 percent rule. This advice in practical terms means that potential homeowners should not spend more than 36 percent of their gross income on total debt. Financial advisors usually push this figure to put your income and debt into perspective as it includes mortgages, home insurance, various bills, student loans, and credit cards.
Go Through the Pre-Qualification and Pre-Approval Process
Using a pre-qualification calculator is a tool to secure a general idea of what your finances can afford. Many reputable banks offer them online, and the required input numbers are pretty universal. You’ll get a snapshot of how much it takes to live the way you’d like in your preferred zip code.
It might be obvious from this quick tally that either it’s a good time to proceed with a more in-depth pre-approval process or that there’s work to be done, either due to a low credit score or because you are carrying too much debt. Expect that the pre-approval process will take more time and resources to compute. Potential mortgage lenders want to see important documents like income tax returns, statements of assets, and multiple months’ worth of your leave and earnings statements (LES).
Budget for Incoming Expenses
If only buying a house were as easy a paying the mortgage payment each month! To an extent, it is, but many other costs factor into the overall picture of how much house you can afford. For first time home buyers, this is usually surprising. Learning about how closing costs, homeowner’s insurance, private mortgage insurance, and various taxes affect your monthly payments takes time. Even taking into account a traditional down payment likely changes the affordability factor of a mortgage.
It’s often mentioned that a good rule of thumb is to plan to buy a home at 10 percent less than your desired loan amount, so you can plan for these payments accordingly. VA home loans are more friendly for service members to obtain because they don’t require a down payment, but will entail different payments, such a funding fee.
Prioritize Your Must-Haves
The ideal house you initially begin to search for won’t often be the home you end up buying. Watching and learning about your local market can turn “must-haves” into “want-to-haves.” Calculating interest rates, mortgage payments, and tax bills have the same effect: slowly removing layers of amenities home shoppers were initially hoping for.
It’s wise to prioritize the options you have little control over such as an easy commute or location near a prized school. If those criteria matter the most, then the three bedrooms and two baths you wanted might turn into two bedrooms and a flex space/loft if the price is right. Or, if time permits, an outdated kitchen and a plan to renovate could yield a smaller asking price. Pick a few priorities and prepare to alter one. You might get lucky and secure them all, but chances are you’ll have to compromise down to your hard line items.
Another priority should be a plan for the house after you’ve moved. If the purchase is for future income or investment purposes, your choice of house and updates should reflect that option. The same is true if the house will ultimately be your forever home or if you decide to sell. All three scenarios require a different thought process detailing how much to spend on the property purchase.
There is so much to consider before jumping into homeownership!
Finances are paramount in the decision making process, but house styles and amenities also play a part. The best tip for deciding how much home you can afford to buy is start learning the process early. Preparing finances and researching loans and real estate agents take a while. Give yourself plenty of time to make informed choices to avoid costly mistakes.