Can I Afford a House?
Most people that are considering purchasing in this market think to themselves, “Can I afford a house?”
Whether or not you can afford a house with a mortgage is dependent on two main factors:?
Are you comfortable with the payment??
One of the best ways to figure out if you are comfortable with the payment is first to examine how much you are paying in rent right now. Then, sock away any additional money that you would otherwise put toward your new monthly mortgage payment and any increase you might expect from utilities.?
Let’s say you pay $1,700 in rent now, and your new monthly payment would be $2,700 plus $100 extra in your electricity bill.?
That is a $1,100 difference in monthly costs. Prepare yourself for the change of a new mortgage by taking that money out of your account each month and putting it into savings. Once you have done this for a month, how does it feel? After two months, how did your life change??
Equity and Fixed Expenses
Owning a home may be painful for a time. After all, you will likely give something up in order to own a home. However, remember that? – along with many other benefits – you build equity in a home. When your rent period is over, you walk away with nothing but your security deposit.?
And, just because your rent may be cheaper now does not mean it will stay there.?
On the other hand, most mortgages are FIXED. The only way your mortgage goes up is if your taxes increase or your insurance increases. These expenses rarely keep pace with rent inflation, which has recently been at 6% per year.?
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Can you pay the payment long term??
When you consider how comfortable you are with the payment, you may consider the future of your income. Will you likely make more money in the future? Are you at the beginning or end of your career? Will you be working for the duration of your mortgage??
Asking yourself these questions may help you get further grounding in your financial future. If your career looks bright and promising, a mortgage payment should be less concerning than if you are soon to close out your career.?
What will a bank lend you??
The question, “Can I afford a house?” also depends on what the bank thinks. To determine what a bank will likely lend you, we’ll use an easy acronym for this: CWIC.?
Credit: The first thing a bank looks at is your credit score and history. Your score does not have to be fantastic for buying to make a lot of long term sense, but most require it to be above 580.
Work: Next, the bank wants to know that you have a steady work history. The nice thing is, they count college and high school as work!
Income: The most important thing that determines how much a bank will lend you is your income vs. your debts. They look at debts such as your monthly car payment, credit card payment, student loan payment etc. to see how much debt you currently have. Then, the bank determines how much of your income could be put toward a mortgage each month. Rules for how much monthly debt you can have change, so that’s why it is important to talk to a lender and learn more about today’s programs.?
Cash: Next, they will look at what kind of assets you have – mostly cash and investments (like a 401k). If you don’t have any cash on hand, it will be hard to buy a house. (Hard does not mean impossible! I’ve seen someone buy a house with only $500 in cash!)
The good news is that you can talk to a lender on the phone and learn what you are likely to be approved for without ever sharing 1) your name 2) your social security number. If the lender is sharp, he or she can help you understand how much home the bank would allow you to purchase during a 10 minute conversation.?
Ultimately, online calculators and checklists can only go so far. How much you can afford varies widely depending on your situation. That’s why speaking with a professional about this matters so much.?
To gain a basic understanding of what you could afford in today’s market, give me a call: 480-639-9640.