Knowing How Much You Can Spend on a House
If you have decided to buy a home, you may wonder about establishing a budget. There are several factors to think about when buying real estate. Know what to consider and what methods you can use to help make sure you can afford what you want. Use our Home Affordability Calculator to find out how much you can afford.
Before Establishing Your Budget
- Improve Your Credit Score: The interest rate for your home loan can significantly impact what kind of home you can afford. To qualify for a lower interest rate, improve your credit score. Start by checking your credit report to identify any issues or errors that must be addressed. Pay your bills on time and work towards paying off as much of your current debt as possible. This will help boost your creditworthiness and increase your chances of getting a favorable interest rate.
- Understand "Good" Debt: While minimizing your debt is important, it's worth noting that not all debt is harmful to your credit report. According to Bankrate, certain types of debt can actually work in your favor. Any debt that you have successfully paid off as agreed shows that you are capable of responsible financial behavior and can positively impact your credit history. Avoid removing this positive debt history from your credit report.
- Consider Long-Term Ownership: When purchasing a home, it's essential to consider your long-term plans. Buying and then selling a home involves costs that may outweigh the benefits if you sell too quickly. Aim to stay in the same location for at least five years to make the investment worthwhile. MoneyNing suggests that renting may be a more financially beneficial option if you anticipate moving sooner.
Saving for a Down Payment
One of the first things you should do when figuring out a budget for buying a home is to know how much you can afford for a down payment.
There are several ways to save money for a substantial down payment and increase the amount you can afford for your house. Forbes suggested turning your hobbies and passions into income. If you are crafty, consider selling your creations on websites like Etsy. If you are a dog lover, offer to walk or watch pets when people are out of town. Your talents can easily translate into money that you can put toward a down payment.
In addition, shopping around for new rates on your regular expenses may leave you with more money that you can contribute toward a down payment. Consider switching your cell phone plan, car insurance, or internet provider. You may also be interested in disconnecting your cable and buying a more affordable option, like Netflix or Hulu Plus.
Determining How Much You Can Afford
Figuring out a budget for a home is not always clear and simple. Monthly payments for a home that costs $300,000 can be different for everyone. Interest rates, taxes on property, your down payment, and credit score all affect your monthly payments.
Mortgage payments generally should not exceed 28% of your monthly salary, and the home's total value should be no more than two-and-a-half times as much as your annual income. Be honest with how much you can afford to pay monthly and set aside money for emergencies.
Some tools available on the internet can help you determine how much you can spend on a home. They typically consider your annual income, monthly debts, and how much money you can put toward a down payment on a new home.
Accommodating Your Budget
If you’re looking for a bargain, you could consider a home that’s been repossessed by the lender. This could be a cost-saving choice, though it comes with certain risks. To determine the potential benefits and downsides, you must identify the kind of property you are looking at. You may need help to bargain for a better price, as bank-owned houses are usually sold as-is. In this case, consider hiring a professional to look over the house so you can identify any issues that may need costly repairs.
According to the U.S. Department of Housing and Urban Development (HUD), investing in a foreclosure property can potentially allow you to buy a home below market price. Additionally, for properties in pre-foreclosure, sellers are often inclined to speed up the sale, giving you a favorable position for negotiation.