When you buy a home, you do not want to end being house poor! Find out what it is and how to avoid being house poor!
Buying a home is a huge financial decision. And one very important part of the home buying process is deciding your budget. If you know how big of a home loan you are able to manage, you are able to be sure that home ownership will fit your budget.
Home ownership ought to cause you to feel safe and sound, including monetarily. Remember to calculate your budget by the amount of home financing you can safely handle.
Why don’t you simply take out the maximum property loan a bank will give you?
Well, simply because your bank does not care about you! Your bank will not think about your present and future financial and personal goals. Look ahead to important life events and think about just how those may affect your finances.
Do you desire to get back to college to get an advanced degree?
Could a new kid bring additional monthly expenditures?
Will a relative need to some day move in with you and help with the home loan?
Think about these complications while you take a look at these home buying tips!
Make a Comprehensive Financial Plan
A general rule of thumb is that you are able to normally manage a house that costs 2 or 3 times your gross earnings. Which means, if you make $100,000, it is possible to pay for a house between $200,000 and $300,000.
That’s not the best way since it doesn’t consider an individual’s month-to-month bills. Your monthly expenses impact what you can afford to pay for a home.
Suppose you make $100,000 a year but have $1,000 in monthly bills for college loans, a car loan, and credit card payments. This means you do not have as much money to cover your monthly mortgage payment as somebody making the same amount but without the same monthly bills.
A wiser choice is to make a budget that will include your regular bills plus your housing expenses. Add up the mortgage, taxes, insurance, maintenance, etc to your current monthly bills.
Think About Your Down Payment
Exactly how much have you got for the down payment? The bigger your down payment, the lower your monthly mortgage payment is going to be. When you put 20% down, you won’t need to get PMI. Private mortgage insurance protects the bank if you stop paying for the home.
If you are not paying PMI, that means you have extra money for the house payment. A lower down payment means you will need a bigger loan. A bigger mortgage means a higher monthly mortgage payment.
Mortgage rates and house prices are increasing. If you delay buying a house so you can save up more down payment, you could wind up forking over a lot more for your house.
Think About Your Total Debt
Banks commonly stick to the 43% principle. An individual’s home loan payments including the home loan principal, interest, taxes, and insurance, plus all of the other bills, must not go over 43% of the gross income. Here’s an example of how the 43% formula works for a purchaser earning $100,000. Multiply $100,000 by 43% to get $43,000. Divide $43,000 by 12 months to change the annual 43% limit into a monthly maximum of $3,583. All of your regular bills including your potential mortgage can’t go above $3,583 per month.
I suggest staying much lower than 43% You might discover a bank ready to offer you a home loan with a monthly payment that exceeds the 43% limit.
Think twice before you bite off more than you can chew. The Consumer Financial Protection Bureau says that studies of mortgage loans that exceed the 43% limit have a higher chance of running into problems.
Let Your Rent Give You a Clue About How Much Home You Can Afford
If you are paying $750 per month in rent now, you should be comfortable paying the same amount for a home. If you consider the income tax advantages of home ownership, you may be able to go higher. But you must remember to budget for the maintenance of the home since there won’t be a landlord to fix anything!
If you are struggling to afford your current rent, you may find that buying a home does NOT makes sense for you now. If you are dead set on buying a home, purchase a house that will have a smaller or equal monthly housing expense. Remember, you’ll have extra expenses such as property taxes, insurance, maintenance, and repairs.
If there is hardly any extra money within your budget for those additional items, you can end up very stressed out. Sometimes it is called to as being house poor!
If you have made it this far, then you have learned some of the steps to take to avoid being house poor!