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When I’m shopping for anything – clothes, shoes, gadgets – my first instinct is to look at the price tag. I don’t want to fall in love with an item that I can’t afford because I’ll either be disappointed that I can’t buy it, or I’ll put an undue strain on my budget to buy it. Now, extrapolate that out to the biggest purchase most people make in their lives – a new home – and the same logic is at play.
Before you even begin your home search, you need to figure out how much house you can afford. Alliant’s mortgage experts gave us some great tips to help you calculate your home affordability and prepare for homeownership.
It’s helpful to calculate your monthly income, your typical expenses and potential monthly mortgage payments before talking to a mortgage loan consultant. Why? Some mortgage lenders will approve loan payments up to 45% of your monthly income. Although some people are comfortable making these payments, you’ll need to calculate the payment you’re most comfortable with.
First, Alliant’s mortgage experts recommend tracking all of your spending for two months. Write down everything you spend money on to determine your fixed costs and discretionary costs each month. Once you have a true picture of your spending habits, subtract that from your gross monthly income and create your budget.
When creating your budget, consider this: most experts recommend spending 28% or less of your gross monthly income on housing expenses. Housing expenses include your mortgage, taxes, association fees and insurance.
You’ll also need to think of all your future loans. We have another good rule of thumb to help you out. Add up all your total monthly debt payments including your potential mortgage, auto loans and credit card debt. Experts say that this number should be lower than 36% of your monthly income.
Once you have created your budget, you can use a home affordability calculator to determine how much house you can afford.
The size of your down payment could impact which types of loan programs you’re eligible for, your monthly payment amount or private mortgage insurance (PMI) requirements. However, you might not need to put down 20% to buy a home. Some lenders have zero down payment programs, like the Alliant Advantage Mortgage Program. Plenty of 3% and 5% down payment programs are out there too. Your best bet is to talk to a loan officer from a reputable lender to see what options are available for your specific needs and qualifications.
If you’re buying a home that is going to need renovations right away, you’ll need to account for those costs. Also, if your new home’s location will require you to make a longer commute or pay for parking, don’t forget to calculate those types of costs into your budget.
One tip Alliant’s mortgage experts recommend is to simulate setting aside the amount of money you’d be spending on housing costs when you buy your new home (basically, the difference between your rent and those future housing costs). This will give you a chance to practice “paying your mortgage.” If you struggle to make this work for 3-6 months, then you know you may have missed the mark when calculating your home affordability. If saving that extra money doesn’t put a strain on your budget, you’ll know you’re on the right track. And as an added bonus, the money you had set aside “paying your mortgage” will create a nice fund for new furniture or the many hardware store runs you’ll be taking as a new homeowner.
Ultimately, the decision whether to buy a home at the top end of your price range is a personal choice. If you can live within a disciplined budget, then buying at the top end should not present any problems. However, if you want more monthly budgeting flexibility, talk to a loan officer about your ideal monthly payment and they can help you determine the sweet spot of your price range.
Either way, you’ll want to get a mortgage rate quote and prequalification letter, so you’re ready to start your home search.
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