Before you start the process of purchasing a house, some serious thinking should be done. In order to avoid holes in your budget in future, you should first of all evaluate how much mortgage you can actually afford, which means that you should reconcile your personal needs and wants with your actual financial status. To put it simpler, there are four main questions you should answer to yourself in this regard.
The first question is how much housing expenses you can afford. Housing expenses are the sum of mortgage principal, mortgage interest, property tax, homeowner’s insurance and private mortgage insurance. Second, you should ask yourself how much overall mortgage payments you can afford. To answer this question, you should consider all other monthly financial obligations your have, including personal loans, like student loans and any other, auto loans and credit card debts. Third, you should estimate how much down payment you will be able to save by the time escrow rolls around. And finally, you are to decide how much money you will be comfortable to spend on a house.
Let’s look at the above matters in more detail and start with the housing expenses. The amount of money a person is ready and can afford to spend on housing expenses varies depending on the personal budget. On the average, a typical American homeowner allocates about 28%-33% of his/her monthly income towards housing expenses, which roughly makes one third of the income monthly. This seems to be a very significant amount, but don’t forget that it covers various homeownership costs, including mortgage principal and interest, property taxes and homeowners’ insurance.
As for the mortgage payments, your total debt expenditure, as has already been stated above, consists of home mortgage payments, other housing expenses, credit card bills, car loan payments and payments for any other kinds of loans you have accumulated over the years. Most lenders recommend that your total monthly debt expenditure should not exceed 36%-38% of your monthly income.
Down payment is a matter of great importance as well. Most lenders require a mortgage applicant to put down at least 20% of the total loan cost. It is possible o find a lender that will require less than 20% down payment for a mortgage, but it strongly depends on the factors like your salary, credit score, credit history and house/debt ratio. Most likely, prepare to pay 20%.
Finally, let’s look into the matter of comfort level. This is a very personal value and it strongly varies from person to person – there are no absolute criteria of “right” and “wrong” here. Ask yourself, how much a house is worth to you and how much of your income you are ready to invest in it compared to entertainment, travel, higher education, health care and other matters important to you.