You have been saving and planning, and now it is finally time to start shopping for your first home! We are thrilled for you! Before you hit the real estate listings or start interviewing agents, you have a little math to do.
Math may not be your favorite subject but you need to know your budget before you start looking at houses.
If you have been wondering "How much mortgage can I afford?" this five-step guide will help you determine a budget so you can shop confidently.
1. Calculate Your Payment and Price Based on Your Income
You can only spend the money you make, so your income should be the basis of your calculation. Be sure to do this calculation before you fall in love with your dream home because it can drive your shopping process.
So how do you calculate this?
It’s best to ultimately go over these figures with a mortgage professional, but you can get a good idea of what you can afford on your own.
Typically, you want the mortgage payment including taxes/insurance/mortgage insurance not to exceed 28% of your household gross (before taxes) monthly income.
Multiply the gross monthly income figure by .28 to find out what mortgage payment you should be considering (ex: $10,000.00 * .28 = $2800/month mortgage payment)
2. Save More for Your Down Payment to Avoid PMI
PMI stands for private mortgage insurance. Most no-money or low-money-down home loans and mortgages charge this or a similar fee. This is an added fee you pay every month just for the privilege of borrowing money.
Does that sound like something you want to avoid? We think so!
So, what can you do to prevent PMI or similar charges? The key is a larger down payment.
For most home loans you need a loan-to-value (LTV) ratio of 80% or less to avoid PMI. This means your down payment needs to be about 20% to protect you from this cost. If you can't save 20% for your first mortgage and home purchase, save as much as you can. Once the LTV reaches 80%, the PMI is no longer necessary. The larger your down payment, the less time you'll be paying this cost.
Discover your maximum house-hunting budget with our free guide:
How Much House Can I Afford in Oregon?
3. Consider Other Possible Expenses of Home Ownership
If all that you budget for is your mortgage, you may wind up feeling broke. Owning a home means many other expenses that should be factored into your budget. Increased utilities, property taxes, homeowner's insurance, and maintenance are all going to be your responsibility as a homeowner.
But don’t despair! These expenses do not have to be excessive. They just need to be considered when you are setting your home-buying budget. When you are asking, "How much house can I afford?" you must consider all of the costs, not just the mortgage payment.
4. Work with a Real Estate Agent Who Will Respect Your Budget
You have done the hard work to determine your budget, but your real estate agent keeps showing you beautiful homes that are just outside of that budget...
Be clear with your agent about your budget, and make sure they are willing to respect it. Seeing homes you can't afford is a waste of time and can make you frustrated. Instead, focus on seeing only those that fit within your budget.
5. Don't Forget Closing Costs and Other Needed Essentials or Upgrades
Finally, as you decide how much mortgage you can afford, do not forget about closing costs. Some of the money you have been setting aside for your down payment may need to also go toward paying closing costs. Closing costs, pre-paid taxes and insurance can be 2-4% of the price of the house. Contact a mortgage professional to get a free estimate so that you can be prepared. .
You may find a home within your budget that requires some upgrades or updates. The shag carpet in the basement has go before you move in after all! Shopping at the lower end of your budget may give you more money for updated appliances or new floors before you move in. You’ll probably need some additional cash to help with the actual move.
Your home loan should be financially beneficial, not draining. By carefully considering what you can afford, you will set yourself up for success in finding a home that fits.
Are you ready to start the home-buying process? CCCU is ready to help you find the perfect mortgage to fit your needs. If you’re ready to start your pre-approval or would like to learn more about the home-buying process, contact our team today!
How much mortgage can I afford is a common question with a complex answer. For a more in-depth look at all aspects of this question, download our "How Much House Can I Afford in Oregon" guide.
