Your Actual Buying Power vs Your Home Budget
Many other emotions are involved when you're thinking about buying a house. Curiosity about whether or not it's feasible, confusion about your options, frustration regarding the process, and relief when you're on the other side of the paperwork hurdles. One misunderstanding that we see a lot of potential homebuyers have is that they believe the home's listing price is the determinating factor as to whether they can purchase the home. That's why in this article, we're going to cover home budget vs. buying power to help inform others about what's included in the price tag.
Budget is the dreaded 'b' word for many people, but it doesn't have to be. The price tag of a house doesn't list how much you'll pay in annual property taxes, homeowners insurance, how much more you'll pay for utilities, or how much you'll need to set aside for maintenance or repairs. Budget experts recommend that you set aside 35% of your take-home pay on the housing category total, but you should only spend 25% of your take-home pay (which would be about 71% of the 35%) on your monthly mortgage payments.
For example, if you, or you and a spouse, brought home $5,000 per month, 35% of that would be $1,750, but $1,250 of that would be for your mortgage, HOA fees, property taxes, and PMI if you choose less than 20% down payment. The rest you would put towards the other areas in the housing category, which include:
Furnishings and appliances
Maintenance and repair
Property maintenance (lawnmowing, snow removal services, plumbing, roofing, HVAC services)
Your Actual Buying Power
Your buying power is how much you can afford to get into the house you have your eye on, but it doesn't just stop at a down payment. You also have to consider the cost of credit reports, appraisal fees, home inspections, loan origination fees, etc. If you choose a down payment of less than 20% of your home price, then chances are you'll have to pay private mortgage insurance as well, which is a yearly fee that costs 1% of the value of the original loan. The length of your loan term also determines how much you pay, plus you have to consider your interest rates. You can easily visualize these factors with any of our mortgage calculators.
Another factor determining your buying power, particularly if you currently own a home, is the proceeds from selling your current home. Many people forget to consider that they'll receive money from selling their house and apply it to their buying power, which will help them put down a larger down payment or help them get into a house they initially thought was out of their reach.
If you want a clearer picture of your buying power, Equity Mortgage Lending is here to help. We're here to help borrowers overcome the roadblocks they face when trying to secure a loan. Get in touch with us by filling out our contact form or calling us at 1-800-581-2853 to let us help you find your best lending solution.
* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.