How to Determine How Much House You Can Afford

There are a lot of factors to consider when trying to figure what price point you should buy a house and how much you should pay a month in housing costs. In this video, I’m going to explain how to take all of these factors into consideration. The first factor to consider is how much money you have saved up for a down payment. Other factors that determine home affordability are mortgage terms, property taxes and home insurance (escrow), HOA fees, utilities, and planned and unplanned maintenance and repairs. It is important to evaluate how all of these expenses compare to your income and other daily expenses.

Hey everyone it’s stephanie are you in the market to buy a house but you’re not really sure what you can afford well in this video i’m going to set you straight i’m going to tell you all the different things you need to consider when you’re getting ready to buy a house i’m going to explain to you how you can determine how much house you can afford so you don’t

Become house poor being house poor is when you spend the majority of your income on things related to housing such as mortgage taxes and utilities and because you put all that money towards that stuff you don’t have enough money left over to save for other goals like investing or saving a lot of people end up in this situation because they just don’t understand

What to consider when getting ready to buy a house according to cnbc 51 of millennial homeowners have regrets about buying their house with their primary regret being that their monthly mortgage payments are too high i do not want you to regret buying your house so here’s what you need to do in order to determine what the appropriate housing price is for you

There’s really two main things to consider when getting ready to buy house and determining the housing price that you can afford the first is a down payment and the second is how much income you are able and willing to spend every month on housing these do tend to play off each other so you need to take both into consideration when trying to figure out your housing

Price first let’s talk about a down payment you must put down 20 of a down payment otherwise you’re going to have to pay pmi pmi is private mortgage insurance and it protects the bank in case you fail to pay your loan a lender will generally impose pmi on you if you put under 20 down and then it will go away once you reach 20 equity in your house do not ever buy

A house if you have to pay pmi because pmi is just the extra fee that the bank charges you pmi usually is around one percent of the original loan amount if you had a two hundred thousand dollar mortgage this means you’d pay an extra 166 dollars a month just for pmi don’t do this now that you know that you should have a twenty percent down payment for your house

All you have to do is multiply that number that you’ve saved up by five and then that’s the maximum amount of house you can afford now notice here i said maximum if you have forty thousand dollars saved up and you multiply that by five that means you can afford a two hundred thousand dollar house but does that mean you can buy a two hundred thousand dollar house

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No there’s a lot of other considerations that go into determining a house price that you can afford and it’s not just the down payment so let’s talk about the other things once you’ve determined your down payment use that as a price point to start looking at what your mortgage monthly payment could be and then once you start looking at the mortgage payment you

Can determine whether or not you can afford a house worth that much in order to determine your mortgage payment you need to know what your mortgage terms will be there’s two main factors that go into what your mortgage payment will be every month the first is interest rate the lower your interest rate the lower your payments will be and generally your mortgage

Rate is determined by how good or bad your credit score is another term that can affect your monthly mortgage payment is the term of the loan a loan can be a 15-year loan or a 30-year loan and the shorter the loan the higher your monthly mortgage payment will be so if you have a 15-year loan your monthly mortgage payment will be a lot higher than if you had a

30-year loan there’s a bunch of calculators out there on the internet that you can use to calculate what your monthly mortgage payment would be you can put in things like the down payment you have saved on a home the potential home house price your credit score and your zip code or state that you live in and it will spit out some examples of what you could have

For a monthly mortgage payment now these aren’t exact so the only way to know for sure what your mortgage rate would be and other terms of your loan is to contact a lender a lender could give you a really good estimate of what your interest rate would be and you can use that to determine what your monthly mortgage would be a word of warning though a lot of times

Lenders will approve you for an amount that is far greater than you ever thought you would pay for a home don’t believe them whatever they tell you you are approved for don’t go for that maximum number go for the number that fits your budget so now you’ve got an idea of your down payment your potential home price and your mortgage payment based on that home price

And down payment another thing you need to consider is is that mortgage an acceptable amount of your income generally lenders have what they call the 28 rule and this means that the monthly mortgage payment you make should be no more than 20 of your gross income which means 20 of your pre-tax income so if your monthly mortgage payment that you got either online

Or from your mortgage lender falls within that 28 then that’s a really good sign but you’re not done yet there is still even more for you to consider when you’re trying to figure out how much house you can afford the next thing you need to figure out is insurance and property taxes do not forget this when you’re calculating your monthly housing expenses your home

Insurance can be estimated by googling what the average home insurance price is in your state and your property taxes can be found by going onto your county website and looking up property tax bills for houses that are of a similar build to what you’re looking for you can also find estimated housing and insurance on sites like zillow or realtor.com and roughly

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Speaking these can cost you thousands of dollars every year so don’t forget this when you’re trying to estimate how much house you can afford most mortgages have escrow and escrow is an account where you pay monthly installments towards your property taxes and home insurance and the bank will make sure that that gets paid for you by dividing your yearly payment

Into 12 it generally makes the property tax and home insurance payments more affordable to the home buyer but what this means is that you will now get even more money added to your monthly mortgage payment escrow really determines on what state you live in what county you live in and what size your house is but generally you could be looking from anywhere between

100 to 400 even more that’s added onto your monthly mortgage payment every month this is so important to remember because if you don’t remember this when you’re looking at housing prices you could find yourself in a world of trouble and also know that whatever your escrow payment ends up being once you’ve closed on your house it won’t stay that way forever i was

Shocked when i got my first notice from a bank saying that my escrow payment was increasing everyone had told me once you get a mortgage it’s the same price forever while that’s technically true your mortgage is the same price forever the escrow account that’s added onto your mortgage is not the same price forever and the reason that this increases is because

Property taxes increase over time and home insurance increases over time and in order for you to cover those bills your escrow account must increase and generally this only increases by like 10 20 or 30 dollars a month but still it can be a shock and a hit to your budget if you’re not prepared for it and also know that your mortgage servicer only does this once

A year so it will only increase once a year on top of mortgage property taxes and home insurance there’s also hoas hoas or homeowner association fees are often charged to property owners who live in a development that have shared community spaces examples of this are homes in a subdivision town homes or condos hoa fees can vary greatly depending on what kind of

Home you have the size of your home and the amenities available in your development they could be as little as 100 a month or as high as 500 a month or even higher so make sure you know if the house you’re buying has hoa fees and how much they would be so you can put that into your monthly housing costs another expense often overlooked by home buyers is utilities

If you are currently renting then chances are some of your utilities are already covered by your landlord and you’re not paying them if you’re a homeowner you’ll be responsible for electric water sewer natural gas and internet this could easily be another one to two hundred dollars a month that you have to spend and the last expense you really need to consider

Is home maintenance things break all the time in houses i can’t tell you how many times i’m fixing stuff here and there in my house some things that could happen are your toilet starts leaking or your refrigerator breaks down or even a light bulb burns out you have to have the money to cover these kinds of expenses you need to make sure you set aside money every

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Month so that when these expenses hit you’re prepared at this point i recommend setting up an excel spreadsheet it’ll help you keep track of everything and you can change things around as you get more information and you can even evaluate different scenarios once you have a good idea of all these different expenses i’ve talked about put all of these expenses in an

Excel spreadsheet and then add them up you also need to consider all your other expenses outside your house do you have a car payment or student loan payments that you have to make every month and what about your credit card bills what do you spend every month on things like groceries and medical bills you need to add all these other things up and come up with an

Average monthly expense of things you spend outside of housing so once you’ve got that number add it to your average monthly expenses and then that is your total expenses that you should expect every month you now need to compare that to your post tax income and if you’ve done all the math in your expenses are less than your income and you feel comfortable with the

Difference between your income and expenses then congratulations you’ve figured out how much house you can afford if your expenses are greater than your post tax income there is no way you can afford that house so you need to start reevaluating and if the difference between your income and expenses is really small i highly suggest considering a house that is less

Expensive because you have no extra money in case of emergencies or to save and invest because remember before i said your down payment is a maximum so use that maximum as a guideline and then see if you can go lower and lower and still get what you want in a lower price range and i do want to state that everyone’s situation is different it depends on what city

You live in where you want to live and what your income is people can afford different things and you might need to stretch some areas over others in order to get what you want there’s no magic number and no magic formula to determine what your house price should be because everyone’s situation is different we need to look at each factor separately and determine

What is most important to us if you have a home price in mind and you don’t see any desirable houses in that range don’t give up it can take a while to find a house you can also take time to save more money for a down payment or get a greater income so you can afford the house you want it is way better to wait and buy a house you can afford than to buy a house

You cannot afford if you found this video helpful give it a like and subscribe to my channel for future videos i’ll see you next time

Transcribed from video
How to Determine How Much House You Can Afford By Stephanie Talks Money