How do you know how much you can afford?

Dh and I are thinking of buying very shortly. How would we know how much we can afford? Do we go somewhere to get approved for a mortgage? Do they take in the down payment amount with everything else factored in and let us know about how much we would be paying each month?

Re: How do you know how much you can afford?

If you want to know how much you will be approved for you can speak to a mortgage banker and they can run the numbers and give you an idea of that.

If you want to know how much you can "afford", IMO that's a different question. And you can use an online mortgage calculator to get an idea of what your monthly payment would be, depending on the home price.

Re: How do you know how much you can afford?

Re: How do you know how much you can afford?

Christine, I know you work a lot in the South Shore Nassau area, is Amityville Village too far for you?

Re: How do you know how much you can afford?

I wouldn't go by online calculators...there is a lot of variation when considering taxes, home insurance, etc

I think the rule of thumb is whatever you take home a month, your payment shouldn't be more than a 1/3 of that. I think that's what I read somewhere

Re: How do you know how much you can afford?

Also, just another thing to consider. Do you want to afford it on one salary or two?

I see many people who live on two salaries. For us, that is too scary. While I would love a bigger house and almost feel entitled to it b/c I make a good salary, DH grounds me and reminds me of what it would be like with that mortgage if either of us lost our job.

Re: How do you know how much you can afford?

Bankrate.com has some good online calcuators but they are just a start.

Individual circumstances will always vary but generally I started out by looking at the household income and multiplying it by 2.5 (3 max) to see what is the max amount of mortgage you can carry.

Ex. If both you and DH work and plan to have your 2 salaries used in mortgage approvals, and both of you earn $ 150K combined - then 150K x 3 = 450K max mortgage you should be approved for..[or $ 375K if you use the more conservative X 2.5 formula]. However, that total loan amount does not take into account taxes, insurance, or PMI (which the bank tacks onto your monthly payment if you did put down less than 20% at closing).

Re: How do you know how much you can afford?

Re: How do you know how much you can afford?

I would estimate your expenses using what you currently have, do you have extra money at the end of the month? If you are renting, do you also pay for utilities (gas/electric, water, sewer, tv, telephone, internet) then look to see what the taxes are in the location you are looking for. Divide it out monthly so you can factor that into your expenses. Once you know how much you have per month to spend, then you should remember to factor in the unexpected household expense that might come up. You also need to figure out how much of a down payment you have as well.

Re: How do you know how much you can afford?

When we started to look, we did it on the following factors (almost a calculation as follows):

Amount we make per month after taxes
(minus) Estimated additional expenses (food, clothes, entertainment, etc)
(minus) estimated mortgage -- you can use a mortgage calculator for this, but just remember if you put under 20% down, you will have PMI, also add in homeowners insurance
(minus) utilities
(minus) saving extra for those rainy days

The number we got back, we made sure we were completely comfortable with and gave us buffer room - and also accounted for if one of us lost our jobs, could one afford to pay for the mortgage, etc.

When we first started looking to buy an apartment, we took how much we were paying for rent which was really comfortable for us, and for our apartment, we only paid a small % higher.

Goodluck!

Re: How do you know how much you can afford?

Being a homeowner now, and in retrospect, feeling like we totally jumped into it way too soon, my BIGGEST piece of advice to people now looking to buy, is to figure out how much you need to get by on ONE income (NOT what the bank will approve you for).

Only reason I say this, is because DH pays all of our taxes/mortgage.

I pay for all the other expenses (i.e. car, utilities, school loan, food, insurances, etc.)

The year after we bought, he had a bad year of business and we basically drained our joint savings completely to pay the mortgage.

There's no way I could do the mortgage/taxes on just my income along with all of our other bills.

We only looked at it before we bought as just being "1000 more a month than our current rent". There is SO MUCH more involved than that.

SO MUCH more.

We have a lot of things we want to do around our house now, but can't afford to because of that lost year of savings.

It really sucks and I know some ppl would disagree with me, but if I had to do it all over again, I wish we waited to figure out a way to make it work out this way.

Re: How do you know how much you can afford?

Message edited 10/9/2012 8:12:49 AM.

Re: How do you know how much you can afford?

I think, when deciding your personal financial comfort zone with a house, it's also important to not just think about where you are today, but where you will likely be in the future. And be conservative.

So for example - When dh and I bought our home in 2008, I was working as a lawyer for a large international law firm and making a very large salary. However, we knew that a time would likely come in the future when I no longer wanted to work there for lifestyle reasons (long hours, travel), and would probably take a job paying less. At the time, I was also pregnant, so we knew that we would have childcare expenses, and all of the other expenses that come with having a child/children. So we chose to buy a home that cost only a fraction of what we were actually preapproved to spend. And I am glad we were conservative, because I did take a major career change in 2010 that wouldn't have been possible otherwise!

I always advise my clients to be forward-thinking. If they are making x amount today, and don't have children but plan to, how does childcare factor in? I've had customers who wanted very specific locations because of jobs they had at the time. But I always ask them to consider, is it possible that you will change jobs, or get transferred to a different location within your job, before you move out of this house? A lot of things can change in life, but a house is a pretty permanent thing for many people.

When buying, the drivers for the decision should always be the big, long-term picture (financial and otherwise), unless of course the buyers state at the outset that they plan to sell the house in the short term (say, 5 years), in which case, the decision is a bit different and more focused on the current needs.