Shopping for a new home is an exciting experience. You are likely to see several houses that immediately steal your heart.
Unfortunately, there is more to homeownership than simply falling in love. You will need to be sure that you can actually afford the house you end up living in. Though your lender can help you have somewhat of an idea of how much your mortgage may be, it will largely fall on you to determine how much of a house you want to buy.
My lender pre-approved me to borrow a certain amount. Does that mean I can comfortably live in a house at my highest loan option?
No.
Just because you have been pre-approved for a certain amount does NOT mean that you will be able to comfortably afford to live in the home. That amount is the absolute highest the lender feels you can pay back, which means it is also the least likely amount for you to be able to pay back successfully.
Strapping yourself with a huge mortgage is a great way to put yourself in persistent financial stress.
In general, most financial advisors will tell you that your home expenses should not exceed 28% of your gross income. In terms of total monthly payment towards your total debt, it should not exceed 36%. This is, however, an attempt to make a general rule, so it may not apply to all consumers.
However, you certainly should not have more than these percentages going towards your home, or else you are setting yourself up for a world of financial hurt.
Your mortgage payment can be dependent on the interest rate you qualify for and the kind of mortgage you can get. If your interest rate is high, you are going to need to look for a more modest home, as even a few quarter points of interest add up to tens of thousands of dollars over the life of the loan.
If you qualify for a low-interest rate, that opens up the ability for you to potentially have more home.
Also, what kind of loan did you get? If you got a Federal Housing Authority Loan (or FHA loan), you were likely required to have mortgage insurance, which is split up into your monthly mortgage payments.
The size of the mortgage will impact the amount of this insurance, so even if you qualify for a large mortgage, the monthly payments may take you by surprise.
However, there is far more to consider when thinking about how much house you can afford aside from the mortgage. The following are financial factors that you should consider in determining how much house you really can afford.
- Property Taxes
- Utility Costs
- Regular Home Maintenance
- Home Furnishings
- Home Insurance Cost
- Family Planning
The silent killer of homeownership. Depending on where you live, your property taxes will play a huge role in how much of a mortgage you can really afford. Property taxes can be thousands of dollars a year, which equals to hundreds of extra dollars on your mortgage payment. If you are going to be a first-time home-owner and are not familiar with the property taxes of the neighborhoods you are looking, you need to familiarize yourself with some of those costs.
Sure, that giant house instantly won your heart, and the mortgage payments are not too bad, but how comfortable do you want to be in your home? If you live in an area with a moderate climate, this may not be a huge issue for you. However, a big house is hard to cool when it is hot outside, and that electric bill adds up quickly. The same goes for heating costs in the winter.
How handy are you? Like it or not, things in your house are going to break and fall apart, and the more house you have, the more upkeep you will be responsible for. If you do not have a lot of cash on hand and do not plan on having a lot available in the future, a large home may prove a challenge for you. The larger the home, the larger and more expensive appliances are, and the more chances you have structural issues that will need to be addressed.
The larger the home, the more furniture and other furnishings you will need to buy to fill the house (unless you like the idea of empty rooms and bare walls). Furniture is expensive and adds up quickly. If you bought a huge house, you are easily looking at thousands of dollars to just furnish it. If that feels like it might be outside of your budget, then the size of the house likely is as well.
You will likely be required to have home insurance if you have a mortgage on your home. Even if you are not, you absolutely should have it. And guess what? The more expensive your home is, the more your home insurance is going to cost you. It is like how more expensive cars are more costly to insure than old clunkers. Just like how utilities increase with the size of your home, so too will home insurance.
Sure, maybe you feel like you can afford that mortgage and related expenses easily now, but are you planning on growing your family anytime soon? If you are, not only will you have the large initial cost of having a baby, but then you will have the perpetual cost of raising a child. If you trapped yourself in a mortgage that was just at the tipping point of your budget and then you throw a kid into the mix, you run the risk of ruining your finances.
Owning a home is a wonderful experience if you plan for it correctly. However, jumping in over your head in a house you had no business purchasing is a sure-fire way to feel miserable in a place where you are supposed to feel wonderful. Especially if you are a first-time home-owner, take the time and care to calculate all of your major regular expenses before jumping into purchasing a home.
