How Much House Can You Afford?
Thinking about buying a house? Then stop texting your real estate agent and start watching this video. Like, right now. Let SAFE Cents walk you through all the real costs of home ownership. It may save you from your home owning you (figuratively speaking, of course).
- How Much House Can You Afford?
Suppose you bought a dog and named him Winston.
Is the price you paid to buy Winston the only money you’ll ever spend on him? Of course, not.
You’ll spend additional money on food, treats, toys, bedding, leashes and collars, grooming, routine vet care, medications, training classes, dog walking, pet sitters, and really ugly Christmas sweaters.
The point is you’re gonna spend a lot of money on Winston after you’ve bought him. And it’s not like he’s gonna contribute.
But for some reason, most of us don’t use that same logic when buying a house.
The thinking usually goes like this: “If they’re willing to lend me $500,000, then I must be able to afford that much house.”
But did you budget for all the other costs associated with new home ownership? Things like closing costs, moving costs, property taxes, homeowner’s insurance, endless other taxes and fees, utilities, landscaping, replacing a broken water heater or worn-out roof — AND the house version of an ugly Christmas sweater, aka hundreds of thousands of lights and decorations.
The lesson? If you buy more house than you can afford, you might not be able to afford to leave it.
Want proof? In a recent survey of homebuyers, 43 percent said they regretted the loan amount they took out for their home.
So, you may want to opt for a less expensive house, OR save more money before you buy. It’s the difference between being house-smart and house-poor.
Making Sure You Can Afford Your New Home
Purchasing a new home is exciting, but so much more goes into it than you’d expect – even if you’ve done it before! One major factor is figuring out how much home you can truly afford. Let’s talk about how.
Part 1: Take a Close Look at Your Finances
SAFE looks at the data and numbers in front of us to determine whether to pre-approve a mortgage loan. However, we don’t know all the details of your life and how you’re spending your money.
What Lenders Look At
When you apply for pre-approval on a loan, SAFE looks at your credit score, your debt-to-income ratio, your income and employment history, and your financial reserves.
- How good you are at paying back the people who have lent you money in the past.
- How much money you owe.
- The length of your credit history
- The types of credit you have in your credit mix
- How many new credit requests you have.
Your income and employment status give us an idea of how stable your finances are and how much you can borrow. Your debt-to-income ratio helps evaluate your risk of defaulting on payments. Your financial reserves show your ability to recover and continue making payments if something unexpected happens. As a rule, SAFE Federal Credit Union places a higher weight on your credit report and your debt-to-income ratio than the other three factors.
SAFE Federal Credit Union can help estimate how much you could spend each month to live in your home, but it’s up to you to decide if that number is comfortable for you. If you know you’re getting a promotion soon you may feel comfortable at the top of your budget, but if you have additional regular expenses we don’t know about, you’d may want to stay closer to the middle of your range.
In short, you need to figure out your personal budget and determine the max you want to spend each month. Once you’ve determined that, remember that whatever amount you decide on isn’t just going to the lender for your payments. You also need to set aside money for home repairs, increased utilities, etc.
Part 2: Understand the True Costs of Buying a Home
Yes, we said you need to set aside money every month for more than just your mortgage payment. Most people get tripped up by that, especially when purchasing their first home. So let’s break it down.
Think about getting a new puppy – let’s call him Winston. When you first get Winston, you’ll have to either purchase him or pay an adoption fee. Right at the start, you’ll have to buy Winston his own collar and harness, plus puppy pads and puppy food. If you’ve never owned a dog before, you’ll also need food bowls and a leash.
You have to take Winston to the vet for his puppy shots and make sure he’s been neutered, then bring him back to the vet regularly for annual check-ins – plus any additional visits when Winston isn’t feeling well. And that’s all the bare minimum of dog ownership. Grooming, cute Halloween costumes, treats, and toys don’t even factor into it.
Suffice it to say that over the course of Winston’s life, you’ll end up paying way more than that initial purchase price.
The same goes for a home. There are upfront costs above and beyond your initial down payment, irregular costs when something goes wrong at the house, plus your regular monthly maintenance and payments.
Just like Winston’s collar, puppy pads, and food bowls, upfront costs will be a blip on the radar over the life of your loan — but you still need to budget for them today. It can impact how much you can afford for a down payment, which can in turn impact things like Private Mortgage Insurance (PMI) and what types of loans you qualify for.
Very few people put down 20% on homes nowadays, but a lot of people put something down. What you can afford to put down is between you and your loan officer, but don’t forget to set that aside when you’re going through this process. If you can’t afford to put anything down, you can still buy a home! SAFE can offer 100% financing.
Regardless of how much you put down, you’ll still typically be responsible for some of the closing costs. These average between 2% and 5% of the total home purchase price. With South Carolina homes averaging about $236,000, that comes out to about $5,000 to 12,000.
Redecorating & Construction
This certainly isn’t a high-priority item, especially if funds are tight, but the easiest time to do big projects on a new place is before you move in. If you need to paint, refinish floors, or do anything to make the space work for you, it’s easier to do it without also trying to live in that space. You may also want to buy new furniture to fit your new space.
These costs will vary wildly based on what you need to do, but it’s something to have in the back of your mind when you’re considering down payments and purchase prices. Of course, if you close on a home with SAFE, you’ll be automatically pre-qualified for a credit card specifically because of how common these purchases are. SAFE’s credit card rates are much lower than a store card you’d get from the home improvement store or the furniture store, plus we don’t have to run your credit again.
Whether you hire someone to move your stuff or you rent a moving van, you’re going to have to pay something to someone in order to move. Even moving boxes cost money! If you want to hire a moving company, most in the Midlands will have you request quotes, but van rentals typically make it pretty clear how much each rental costs and what it can comfortably hold.
Now come the “vet bills.” Many experts recommend setting aside a minimum of 1% of your home’s value every year for routine maintenance, with some recommending more. If you save 1 to 2%, that'd be about $2400 to $4800 a year or $200 to $400 a month on average. If you can put that much into savings upfront, that’s great. Most of us, though, will need to factor that into our monthly costs.
If dear Winston cost a pretty penny and you set up a payment plan, you’d be making monthly payments. But even if you bought Winston outright, you’d have regular monthly bills for him: pet insurance, licensing fees, flea and tick prevention, and his monthly food bill. Your home’s monthly payment lumps most of those items together to make it easier for you.
The bill from your lender will typically include:
- Loan interest
- PMI if applicable
You’ll also want to set aside for those “irregular costs” we mentioned before, and you’ll want to try to understand how your utility bills will change once you move. (Pro tip: see if the sellers can provide you their most recent utility bills so you can get a sense of what it typically costs them, compared to what you usually spend. They’ll likely have different habits than you, but it should give you a ballpark.)
What are Escrow and PMI?
Escrow is the estimated amount that your insurance and taxes will cost each year. Rather than surprising you with a bill at the end of the year, your lender will charge you a prorated amount throughout the course of the year and then use that amount to pay those bills. Keep in mind that while you already pay for renters’ or homeowner’s insurance, that amount will almost certainly change with a new home. Both of these costs vary greatly based on your county and your home, but we typically estimate 1% to 2% of the home’s value each year (about $200 to $400 each month).
PMI, or Private Mortgage Insurance, is purchased by lenders to help offset the risk of agreeing to lend money to people who can’t put 20% down on their home. It averages $100 to $300 per month for typical South Carolina homes and will go away once you’ve reached 20% equity in your home.
What’s it all mean?
Figuring out what you can afford to pay for a home isn’t as straightforward as taking the max you’re prequalified for, nor is it as simple as finding a place where the mortgage payment will be exactly the same as your rent payment. It takes careful consideration of your budget, your comfort level, and what owning a home truly entails. Honestly, the hardest part may be realizing that this is just one of many steps in the home-buying process before you even contact a realtor. No matter what, though, SAFE Federal Credit Union is here to help you work through your options.