WONDERING HOW MUCH YOU CAN AFFORD?
Wondering if you’re financially ready to buy a house? A home is likely the largest purchase you will ever make, so it’s important that you feel confident about how much you can afford before you start looking at homes.
The first step in the home buying journey is to get pre-approved, but in case you’re not quite ready to speak with a lender just yet, I’ve outlined a few guidelines that can act as a starting point for answering the question: “Can I afford to buy a house right now?”:
Let’s review the 28/36 “rule”
HOUSING EXPENSE RATIO (28) —
This rule suggests that your total monthly housing expenses (mortgage, property taxes, homeowner’s insurance, HOA fee, etc.) should not exceed 28% of your gross monthly income.
DEBT-TO-INCOME RATIO (36) —
This rule suggests that your TOTAL debt payments, including your housing expenses (credit cards, car loans, student loans, etc. + your total mortgage payment), should not exceed 36% of your gross monthly income.
QUICK TIP: It’s important to remember that lenders will qualify you based on your GROSS, pre-taxable income, which is typically not your take-home pay, so you should put together a budget to ensure that you are going to be comfortable with your new mortgage payment — you don’t want to end up “house poor.” Developing a comprehensive budget that includes all your expenses, savings goals, and income sources will provide a more accurate picture of what you can comfortably afford.
But how does that equate to price?
That depends on a few factors, including:
- YOUR DOWNPAYMENT
- The more money you put down, the lower the payment. Put 20% down, and you get rid of monthly mortgage insurance. Don’t forget to factor in closing costs when budgeting for a downpayment — closing costs can range anywhere between 2-4% of the purchase price.
- INTEREST RATES (and your credit)
- Your credit and downpayment will determine your interest rate (among other factors)
- TAXES
- When using those fancy online mortgage calculators, don’t forget to add the property taxes to your payment! Take the annual taxes and divide by 12 to get what you would pay monthly.
- CONDO / HOA FEES
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- If a home is in a Condo or Homeowner’s association, you can pay anywhere from $100-500+ a month. This will ultimately decrease your buying power & how much you can afford.
- For example, at a 6.5% interest rate, a $200/monthly HOA fee will decrease your buying power by about $40,000
Still feeling a bit unsure? I’m here to help! Send me a message, and let’s discuss your homeownership goals!
Kathleen@kathleenmillerrealestate.ca
or 647-500-3528