How Much House Can I Afford?

How Much Can I Afford to Spend on Housing?

Written by Nathan Woolard

There’s a lot of excitement involved in buying a new home and it can certainly be fun to look around at options that fulfill your more extravagant dreams.  However, when getting caught up in the thrill of your fantasies, you might forget to ask yourself the most important question:  how much can I really afford?  As much as you may like to splurge on a home with a big yard or fancy kitchen, you’ll only be digging yourself into a financial hole if you can’t pay the mortgage each month.

You should take a close look at your personal spending habits to determine a specific limit that is truly right for you.  Use the following steps to get an idea of what you can handle:

1.       Add up your total monthly income.  Figure out how much you (and, if applicable, your partner or co-buyer) earn each month.  Be sure to include any and all forms of revenue, such as alimony, rental earnings, and investment profits.  This will tell you your total monthly take-home pay.

2.       Subtract your non-housing expenses.  Tally up your non-housing costs from other monthly obligations, like credit card payments, student loans, groceries, utilities, insurance, and so on. 

3.       The difference is an estimate of what you can afford.  After subtracting your debts and expenses from your total monthly income, you can more accurately judge what you can reasonably spend on your housing each month.  Keep in mind, your monthly housing budget will need to cover not only the principal and interest on your loan, but also property taxes and homeowner’s insurance.

Beyond looking ahead to your future monthly payments, there are also more immediate costs that you must be prepared to shoulder, as you will need to pay a certain amount upfront as well.  Here are a few tips on how to make smart choices when planning your down payment:

1.       Determine how much you can spent upfront.  Look over your savings and investment statements to add up your total available funds.  Decide how much you want to save for other goals, as well as moving costs and home renovations.  Then set aside a further amount as an emergency fund, preferably consisting of at least three to six months’ expenses.  Subtract all this from your available funds to see how much you can pay upfront for your home.

2.       Estimate your closing costs.  Besides your down payment, you must also be prepared for the various “closing” costs of finalizing your loan and home purchase.  These costs are dependent on several factors, including the price of your home and the type of loan you choose, and can be difficult to precisely estimate early on.  Generally, closing costs tend to range from 2-5% of the home purchase price.

3.       Maximize your down payment.  Subtract your closing costs from your available upfront budget to determine the maximum down payment you can afford.  You’ll need to pay at least 11% of your home price, but 20% would be ideal.  Spending more upfront means you’ll have lower monthly mortgage payments.  If you can afford it, maximizing your down payment can save you a lot of money on interest in the long run.

Success Bank also has several helpful calculators on our website to help you with the number crunching.  The calculators allow you to enter specific information and in return generate an estimate of the amount of loan you can afford, the monthly payments for a given loan amount, or even the total home worth that you might be able to afford.  Once you have calculated the affordable range for your down payment and monthly payments, you can speak to a lender about interest rates, types of loans, and mortgage term lengths.

Ultimately, the most important thing to remember is that an affordable housing payment is one you can reliably make every month.  The amount a lender is willing to loan you isn’t necessarily how much you should spend.  A lender can’t tell you how much you can afford; only you can decide how much you are comfortable paying, both upfront and monthly.