Buying a home is one of the American Dreams we all strive for. For many of us hunting for the our next home in Lexington, we often forget the costs that come with buying a home. Such a large undertaking requires careful consideration and planning before we carry out the transaction. Often, we have one concern on top of finding the “dream home,” which is: “Can we afford it?” Finances are always a concern and without proper evaluation, we could find ourselves in hot water. To avoid making any mistakes during the home buying process, here are few tips to evaluate how much home you can afford:
1. Understanding the Housing Ratio
The housing ratio is the percentage of your monthly gross income dedicated towards housing expenses (while living there). These expenses generally include home ownership costs like utilities, insurance, maintenance, and repairs. As a home buyer, you need to evaluate how much money you earn each month, and subtract 30% of that to expected home ownership expenses, including mortgage payments. For example, if you have a gross income of $85,000, then you can afford nearly $2,000 in mortgage payments (including other costs).
The reason you don’t want to exceed 30% of your gross income is that you want to have emergency funds. You (and your lender) doesn’t want you to be strapped for cash while paying for a house. It could put a strain on your budget and force you to go into foreclosure if you happen to lose your job, etc.
2. Total Debt Obligation Ratio
How much do you have to pay in recurring bills each month? This includes things like student loans, car payment, credit cards, child support, and alimony payments in addition to housing costs. The percentage of your gross monthly income that these debts eat up is represented by your total debt obligation ratio.
Before buying a home, this figure should be around 36% or lower. If it’s currently much higher than that, most experts strongly suggest putting off home ownership until your debt load is reduced.
3. Down Payment Percentage: What’s Reasonable These Days?
Twenty percent is considered “standard” for a down payment. While it’s certainly possible to get a mortgage with a smaller down payment, you’ll probably have to purchase private mortgage insurance for a mortgage loan accompanied by a low down payment. This will end up substantially increasing your monthly payments. In addition, many mortgage providers are much less enthusiastic about sub-twenty percent down payments in the wake of the housing crash and sub-prime mortgage fiasco of the late 2000’s.
To ease the burden of your mortgage rates and payments, we recommend you continuing to save up for a down payment before buying a house.
4. What Else Should I Consider Before Looking at Homes?
A mortgage is, in essence, just another type of loan. So, it makes sense that your credit score would be important. Make sure you know what your score is, as a good score could substantially improve the terms of your mortgage. If you’re not quite ready to buy a house today, try to improve your score as much as you can before you’re ready to seriously start looking for homes. Paying off debts and being consistent with credit card payments, for instance, will begin boosting your score quickly and could make a real difference when negotiating mortgage rates.
5. The Importance of Planning for the Future
The right home for you isn’t necessarily the most expensive or fanciest one you can afford. The house or condo you select should be the one that best matches your personal tastes and life goals. For instance, if you’re planning to start a family, a residence with a few extra bedrooms and a nice big yard may be ideal.
Buying a Home in Lexington, KY
As you get serious about buying a home in Lexington, Kentucky, consider how much you can afford before making an offer. Factor in how much you’ll pay each month and what remaining income you’ll have leftover for living expenses. By running a few numbers and talking to a qualified lender, you can set yourself on the right track to buying a home. If you want to be one step ahead of preparation, we suggest talking to a lender and getting pre-approved for a mortgage. This will give you a deeper insight into how much you can afford when buying a home.