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Figuring Out How Much Home You Can Afford

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Buying a house is a big step. For most Americans, a home purchase will be the largest investment they ever make, but as the last few years have shown us, many homebuyers can quickly get in over their heads. It can be easy to miscalculate how much home you can actually afford, but once you have the right information, it’s also easy to build a solid budget. There are plenty of mortgage calculators available that can help you project a monthly mortgage payment or even help you figure out how large of a loan you can afford to take out. The biggest challenge for many first-time homebuyers, however, is learning all the things they don’t know, says Rosemarie Pirio, marketing manager for New American Funding. If you’re building a budget to buy your first home, here are a few things she says you need to make sure to include.

Account for All Costs

cobleskill_house_160The jump from renting to owning can present many financial challenges for first-time homebuyers. Monthly rent may be higher than a mortgage payment, but home ownership brings a raft of new monthly payments that can overwhelm new buyers. When you sit down to determine your overall monthly payments, make sure you include the following on top of your monthly mortgage:

  • Down payment and closing costs:  Most first-time homebuyers are familiar with a down payment as the first obstacle to securing a mortgage, but the additional costs of buying a house can add up quickly, often adding up to two to five percent of the purchase price. Closing costs commonly include attorneys’ fees, title costs, survey fees, application fees, appraisal and inspection fees, warranties and more.
  • Homeowner’s insurance: The average U.S. household will pay $896.73 in home insurance premiums in 2013, but nine states have average premiums in excess of $1,100 per year.
  • Real estate taxes: Your real estate taxes will vary depending on where you live, and will likely change often during your ownership of a home. Some states have property taxes near two percent of home value, though most hover near half a percent.
  • Homeowner Association Fees: Everyone has a different opinion on homeowner associations (HOAs), but if you’re moving into an HOA neighborhood, be ready to pay monthly HOA dues that can run into the hundreds of dollars.
  • Miscellaneous fees: These will include mortgage insurance premiums, utility costs, and home maintenance charges. The last two can be shocking to new buyers who are used to landlord maintenance. To properly budget these numbers, call your local utility to get an average utility bill for the address you’re looking to buy, and make sure to have a home inspection done before you commit to buying.

Build a Budget

There are many schools of thought regarding how much you should dedicate to your monthly housing costs, such as the 50-20-30 rule (50 percent to housing, 20 percent to finances and debt, 30 to lifestyle). However, a better rule of thumb when it comes to mortgages is to learn what ratio your lender will look for. Many lenders recommend 28 percent of pre-tax income should cover your housing costs – including your property taxes and insurance – and 36 percent should cover your housing costs and all other debt payments like credit cards or fixed monthly costs.

Choose Your Representation Carefully

Buying a house you can afford takes a lot of careful planning and budgeting, and it helps to have a good team around you. Your real estate agent is one of your best defenses against being overcharged during a sale, so it’s important to choose an agent who is ready to fight on your behalf. And while your agent may be on the frontlines for you, your purchase should start with an upfront credit approval or pre-approval from your lender. They’ll help you secure financing and make sure you know exactly what you can afford before you even make an offer.

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About Brian P. Russell

Brian Russell lives in University of Florida's Gator Country. He enjoys exploring new places and learning new things, plus sharing what he's found with others. Turnoffs include double spaces after periods and emails with unneeded CCs. He plays H-O-R-S-E at 3 p.m. EST every weekday at 352 Media Group.
  • Janet Moore

    With all huge things that you want to purchase, building your budget is the first thing to consider. http://www.beltonhomesforsale.info/

  • bliffle

    Many people, especially young people and singles, may find Tiny Homes are a good option. Tiny Homes are generally 150 to 800 sq. ft. (although I’d consider 600 an upper limit). The are designed for efficiency and simplicity, but that does not mean they need be drab or cramped (there are some books and magazines on the subject that feature lovely and livable nice small homes). Some people build their own, for about $2,000, and some people have them built for about $50,000. Often the house is built on a trailer chassis so the owner can move it to a different location, which may solve a land problem.

    Many owners of Tiny Homes are off-grid, which obviates expensive electric hookups in remote areas. As you might guess, Tiny Home fans are typically Greenies with great interest in composting toilets, etc.

    Tiny Homes are often built on lots in the boondocks, with substantial distance to neighbors. Tiny Homes are NOT a rationalization for increasing residential zoning density. One of the nice things about living in a Tiny Home is the increased open space that surrounds one, and the increased feeling of intimacy with that space.