It is fun and exciting to browse through online real estate listings and dream of living in the homes for sale. But when it comes time to really start looking, one of the toughest questions to answer is: “What can we afford to pay for a home?” As tempting as it might be to find a home you love and reverse engineer a budget that allows you to afford it, you will be much better off down the road if you take an honest look at your finances before you start your search. Keep in mind that you will likely qualify for a mortgage that is larger than you can truly afford.
First consider what you can afford as a down payment. What funds do you have available in savings, or in accounts that can be accessed for a home purchase (check with your tax advisor before tapping into any retirement or investment accounts so that you are aware of any tax payments or penalties you might be subject to). If a friend or family member has offered to help with a downpayment, find out exactly what they are able to contribute. Don’t worry if you aren’t able to put down a large amount – you could consider an FHA loan for which you may qualify with as little as 3.5% down.
Don’t deplete your savings just to come up with a substantial downpayment. In order to qualify for a home loan you will need to show some “reserves”, or money at your disposal to cover a few months worth of mortgage payments. It is also smart to have an emergency fund in case you have a large unexpected expense soon after moving in.
Next think about what you can afford to pay each month as your housing payment. In general borrowers can qualify for a loan that requires them to pay as much as 28% of their income each month towards their mortgage payment (which includes principal, interest, taxes, insurance, and any other escrow payments) but that may be more than you can comfortably afford to pay. Look at your other expenses which may include other debt payments (car loans, student loans, credit card debt, etc.), utilities, groceries, gas, child care, entertainment, insurance (health, life, auto, etc.), gifts, and what you put into savings, college fund, and/or retirement accounts. You can then see what is left over which can be used for your monthly mortgage payment.
If the numbers don’t add up to quite what you were hoping keep is mind that it is still a strong buyers market, and you may be suprised to see what you can get for your money. In addition, Texas mortgage rates remain extremely low helping you stretch your housing dollars a bit further. Best of luck with your search for a new home!
Kelly Decker is a Texas mortgage expert with The Decker Group based in McKinney, TX. Contact Kelly for a quote for today’s mortgage rates or to get prequalified at 972-591-3097.
This post has been a guest post, which I felt could benefit my readers.