There are lots of different opinions on how much house you can afford. There are those who subscribe to the notion that you should buy as much house as you can afford. The downside of course is when your income drops even slightly and you’re struggling to keep up with the payments. On the other side of the coin, there are those who suggest buying a house with cash. While it would be great to own your home outright from the beginning, most people are not in the financial position to do so.
Many Americans make a down payment and get a mortgage ot finance the rest when buying a house. For those looking to buy a house with a mortgage, I wanted share some advice based on our experience (the good and the bad).
Looking at Your Numbers
The general consensus seems to be getting a mortgage that is no more than 2-3x your annual salary. That typically means you have a mortgage payment that is around 25-30% of your monthly income. For us, our personal goal was to have a mortgage income that was 25% or less of my husband’s net income.
When we were home shopping we received a letter from the lender that we were pre-qualified for a certain amount on the mortgage. When we looked at the number is was much higher than we expected. When we applied, we decided to use only my husband’s income. We wanted buffer room in case one of us lost our jobs or our income dropped. We read about too many people losing their homes due to one financial setback. The bank however, did not take that into consideration and gave us a loan that gave us little wiggle room for anything else.
The lesson learned? Even if banks may suggest you can afford more, be careful. Look at your circumstances and decide for yourself if the amount is right for you. You are under no obligation to go for the maximum amount allowed.
Stash your down payment fund in a high yield savings account.
Buying a House is Than Having a Down Payment
While you’re saving up money for your down payment, keep in mind the other costs involved with buying a home. Some of these expenses come up when you’re deciding if a house is the right one for you and the others will be included in your closing costs. Plan ahead now to make sure you have enough money in the bank to take care of it.
- Credit Report
- Closing Fee
- Title Search
- Homeowners’ Insurance
- Escrow Deposit for Property Taxes & Mortgage Insurance
- Transfer Taxes
- Recording Fees
- Processing Fee
- Underwriting Fee
- Loan Discount Points
- Pre-Paid Interest
- Property Tax
- Pest Inspection
Plan Your Down Payment Before Buying a House
Buying a home can be a great experience, but it can also be a nightmare. If you’re not in a position to buy a home, don’t worry. Rent can be a wise choice for many people. Don’t be impatient; wait for the right time. In fact, with some areas having a lot of empty homes, you may be able to rent a home at a decent rate. This gives you the option to test run home ownership without the big commitment.
What advice do you have about qualifying for a mortgage? Did you rely on the estimates from the lenders or did you run the numbers yourself? Did you receive any pressure from your real estate agent to get a more expensive house? If so, how did you cope with it?