Your family is growing. Your job is going pretty well. You keep reading about how now’s the best time to buy a home if you’re going to move up. So what’s stopping you?
Buying a home is a big investment—and even bigger as you buy up into higher price brackets. If you’re worried about how much home you can truly afford, we’re here to help. EXP offers a mortgage payment calculator that help you determine the best price range for your household’s budget.
But first, let’s look at six factors that affect how much home you can really afford.
Your Monthly Income and Budget
The most obvious metric to consider when determining how much home you can afford is your income. However, as obvious as it is, it should not be taken lightly. You know from your first home purchase that unexpected expenses come up with a new home purchase. In addition to your monthly mortgage payment (and any included taxes and insurance that add to that bill), it’s important to set aside some funds each month for home repairs and maintenance. How much are you able to afford and still provide yourself with a financial buffer? If your new home will be considerably larger or in a different climate, consider utility expenses, as well, and how those will change your monthly budget.
The Future of Your Job or Career
How stable is your job? How about your partner’s? Are either of you considering a major career move in the next five years? Or will someone in the family drop out of the workforce in the next few years to care for family? Does your company’s growth plan seem feasible and stable, or do you expect your boss to pull the rug out from under you any day now? In addition to considering your current income, it’s important to think about how your income may change in years to come and how that will affect your ability to cover your mortgage payments.
Your Income-to-Debt Ratio
Regardless of your hard-earned credit score and the projected loan amount that correlates to it, the amount of home you can afford is ultimately determined by how much you can afford in your monthly mortgage payments. Think about your monthly income and expenses. If you are spending a considerable amount of money each month toward your debts (e.g., car loans, student loans, medical expenses), you will need to take that into account before you begin your home search. Also consider major future expenses, like weddings, and how that will affect your debt.
As a rule of thumb, no more than 36% of your pre-tax income should go to pay debt. This includes up to 28% going to your mortgage payment, leaving 8% for other debts like student loans and car loans. For instance, a household earning $5,000 each month should spend no more than $1,800 on their combined monthly debts. However, if you already spend $350 on a car payment and $150 on student loans each month, that leaves a maximum of $1,300 to comfortably cover all of your home expenses.
The Home’s Location
If you’re planning a move up to a higher-end neighborhood, don’t forget to consider the added expenses of that new location. Look at property taxes, HOA rates, insurance and security costs, property maintenance, your commute costs, and other factors that will not be included in the purchase price of the home, but which will affect your wallet.
Your Down Payment
It feels great to put down a fat down payment on a home (20% is recommended). If you’re moving up and selling your current home, that down payment could be even larger. But don’t forget to save some money for your living expenses. If you’re buying a larger home, maybe you’ll need additional furniture. If you want more property, do you have the equipment to take care of it? Planning those purchases could deflate your down payment, and thus affect the way your lender approaches your loan.
Your Priorities and Needs
Ultimately, it’s up to you—not your real estate agent or mortgage lender—to determine how much you’re willing to pay for a home. In many cases, this requires some long-term financial planning and prioritizing. Are you willing to forego that new car loan for a few years so you can get that extra bonus room? Is being closer to a good high school worth working overtime to cover the cost of your daughter’s braces? Would you rather buy at a slightly lower price range and use the savings to build that backyard workshop you’ve always wanted?
These are not easy questions. But by examining your needs and priorities, you can determine how high you’re willing to negotiate with sellers on the home of your choice, or when you know you should step back and keep looking. This will make you more confident in your decision and more comfortable with your purchase in the long run. In the end, having a clear picture of the life you want to lead—now and into the future—will help you find the right home for your needs.
All real estate is local. In order to make confident real estate decisions, we believe it is important for you to have timely and neighborhood-specific information. If you would like more information about buying a home in NC, our experts at EXP Realty are here to help. Contact us today to speak with a EXP agent about buying homes or land in North Carolina.