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September 15th, 2020

House Hunting? Here’s What You Can Afford.

In the market for a home? The process may seem intimidating– and it should be. Buying and selling a house are the two single largest monetary events for the majority of people. Obviously, you want to find the house of your dreams, but given the magnitude of the purchase, do you know what is truly feasible given your household budget?

Here are 5 factors to help determine your budget for purchasing a house:

  1. Income: This will act as a baseline in calculating what you can afford to pay each month.  Asking yourself the following questions will help determine how much of your income you want to use in your calculations:
  2. How stable is your job?
  3. Does your year-end bonus constitute the majority of your pay? How confident are you in receiving it each year?
  4. Does commission play a big role in your compensation plan?  How volatile are these payouts?
  5. Current Debts: Do you currently have any debt? What percentage of your income is currently going towards these payments?  How soon will these payments end?
  6. Monthly Expenses: What do currently spend each month on expenses that will not go away any time soon? Include everything from average grocery bills to insurance premiums to utility bills.
  7. Closing Costs: The money used to pay for one-time expenses such as down payments (20% is our recommendation) and closing costs (lender and third-party fees paid after the transaction). 
  8. Have you saved up enough cash to handle these expenses?
  9. Moving and Furnishing: Once you pay the closing costs, will you have enough cash left to afford the actual move?  Think beyond just physically moving your belongings from one place to another and factor in minor repairs, improvements, furniture needs, etc. Neglecting this expense results in credit card debt for many recent homebuyers.

Once these factors are determined, the standard rule-of-thumb is the 28%/36% rule, meaning you shouldn’t spend more than 28% of your monthly income on home-related costs, and 36% on debts including your mortgage and credit card. Use this as a base for calculating a home’s affordability, ensuring you include any foreseeable changes to your savings as well (i.e. starting a family, getting a new job).  Our recommendation is to stay under 25%, but if the intended timespan is 8+ years, then it is okay to move closer to the 28% mark.

Everyone wants to experience the feeling of purchasing their very own home. It is a personal achievement that every individual looks forward to. Throughout the hectic process, remember to keep your emotions in check and attentive to the financing. Avoid getting caught up in the excitement and focus on homes that fit into your financial plan to aid your long-term success.

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