How much house can I afford?
This is a question that is asked by every single person buying a house. While some may need to know the exact number a little better than others, we all need to have a pretty good idea before we even begin shopping.
There are a few things to consider before we are able to get to that final number.
My mortgage experiences
I’ve purchased two houses in my life and they each went a little different. During each of these I was asking myself, “How much house can I afford?”.
On the first home my banker was a family friend. I told him the prices of housing we were looking at and all he told me was that we were good to go. He didn’t try and sell me a price tag that was much larger.
My second house went quite a bit differently. We were living in a hot real estate market so we actually bought our next home before selling our current home. Therefore I technically owned two houses at the same time.
In order to accomplish this I needed a bridge loan (essentially one huge loan) to cover both mortgages. Want to hear the crazy thing?
I got it. The loan was for an amount I never even would have considered buying a house for, yet, per their internal calculations and metrics I was a safe bet.
Here’s the thing. I didn’t care. I would never have felt comfortable with that number long term. Sure I didn’t have an issue paying that high mortgage cost for a few months but not in perpetuity.
How do the banks decide your pre-approval amount?
When you visit the bank they may or may not give you a number that you are approved for. Guess what?
I DON’T CARE WHAT THAT NUMBER IS
You know what the banks don’t take into account? Anything in your personal situation. The bank doesn’t think about anything like:
What’s your risk tolerance?
Do you have any big expenses coming up?
How secure is your job?
Will you need a new car sometime soon?
They don’t care about your personal situation. They put numbers in a calculator and get a number back.
Its on you to decide how much house you can afford. Not anyone else. Take ownership of the situation.
If you go in asking for pre approval and the bank denies you, you need to reevaluate everything.
What other house expense are there?
The thing that most new homeowners don’t take into account are all the other expenses that don’t show up in a mortgage calculator like this one.
When most people ask the question of how much house can I afford all they worry about is the mortgage payment itself.
The thing is you should care about so much more than that. You are going to have to pay these costs and, if they aren’t accounted for, could play a huge role in your monthly budget. Here is a list of a few expenses you need to consider.
This is definitely something you need and may add up to a reasonable amount of money. Talk to friends and family about how much their insurance is relative to the value of their home.
Depending on where you live property taxes could be a significant hit. I’d highly recommend looking at some tax bills on your county’s assessor site to get a better idea of this.
FYI usually (but not always) property taxes are roughly a percentage of the assessed value of your home.
Private Mortgage Insurance
This is also known as PMI. If you don’t plan on putting a hefty down payment onto your mortgage this will affect you. I’d talk to your banker to see how much this will cost.
If you think you are moving into a new house and not changing anything you might be crazy. On our first home we spent about 5% of the purchase price on renovations before we even moved in.
On our second home we spent about 10% of the purchase price on renovations. All of this was done in cash.
While this won’t affect your mortgage payment it will have a dramatic impact on your family’s finances. Please set aside money for this.
Furnishing a home can get costly quick. This can definitely hit you if you are moving into your first home or are upgrading the size of your house dramatically.
I can’t emphasize enough doing the following two things:
First, you must prioritize what you need now and what you can wait on. Spacing out the furnishing of a home over the course of 3-6 months can really take the pressure off.
Second, look for second hand things when you can. I’d guess that you only need “new” stuff for a small percentage of your home furnishings. Save money where you can.
Home Repairs & Lawn Maintenance
This is something nearly everyone, including myself, underestimates. Your home is going to need some work whether you do it or pay someone.
Not to mention a mower, trimmer, etc to keep good care of your lawn.
Repairs and lawn maintenance are costs that are going to happen either as you need them or in one big push.
They are going to come up, regardless of what you think. As you get into your nice, new renovated home a laundry list of projects are going to come up.
How much house can I afford?
This is a difficult question to answer. Frankly, I’m not going to. The only thing to keep in mind is that its better to be more consersative than not when it comes to the amount you are willing to spend on your mortgage.
Run through my list and see how each of those will affect your thoughts on buying a house. For instance, if your mortgage will push your monthly budget to the brink each month you wont be able to renovate or do any projects. Is that what you want?