Real Estate Math: What Can I Afford?
As a buyer, deciding on your budget can be a tough first step. On the one hand, you'll want to make sure that you purchase a home that suits your needs, but on the other, you don't want to be left feeling "house poor" either. Luckily, with a few simple equations, you can set a budget that works. We've laid homebuying's major costs out for you below.
Step 1: Figure out your monthly payment
Start this process by adding up all your sources of income for the month. Any reoccurring payments count, such as your main paycheck and supplemental sources of income like those from a second job or support payments. However, one-time sources of income should not be counted.
Traditionally, monthly housing payment should account for between 25% to 36% of your monthly take-home pay, including supplemental costs like taxes and insurance. To find out what your monthly payment would be at each of those percentages, simply multiply your total monthly income by 0.25. Then, multiply it again, this time by 0.36.
You're next you need to find a monthly payment that you feel comfortable paying. The two numbers from the equations above create a range. From here you need to look at your other expenses and decide what feels right for you.
Step 2: Use a mortgage calculator to determine your maximum sale price
Once you have that number in hand, use a mortgage calculator. Be sure to use one that allows you to work backward and input your total monthly income in order to determine the maximum amount of money you'll be able to borrow at that monthly payment. We like this one.
Step 3: Determine your down payment
The down payment is the portion you pay upfront and is expressed as a percentage of the loans overall value.
In the past, a 20% downpayment was the standard bearer however today's buyers will be happy to know that's no longer necessary. These days it's more common to see down payments that range from 3% to 5% of the home's purchase price. Though, if your credit score is lower, you may have to bring closer to 10% to the table in order to be approved for the loan.
The downpayment that you need will depend on the loan program you choose. Until you're ready to apply for a loan, you can estimate the amount you'll need by multiplying your budgeted sale price, first by 0.03 and then by 0.05. If you don't have that much cash on hand right now, make it a goal to start saving toward those amounts.
Step 4: Calculating Closing Costs
Closing costs also need to be paid at the time of settlement. Closing costs account for any fees that were accrued in closing on the home. They usually include things like your inspection fees, title search fees, and loan origination fees. Typically, they'll amount to 1%-2% of the home's purchase price, which is then split between the buyer and the seller.
For a rough estimate multiply your budgeted sale price by 0.01%. Another option to paying upfront is to ask for the seller to cover your portion of the closing costs when you write up your offer. The seller would then pay for all of the closing costs upfront and your portion of the payment will be rolled into your mortgage.
Step 5: Reach out to a mortgage broker
It is never too early to have your first discussion with a mortgage broker. Whether you are still in saving mode or you are ready to start shopping, a mortgage broker can give you vital advice by assessing your credit score, your income, and your home buying plan to help you get on the right track. If you are ready to take the next step contact Andy Green (818) 422-6256 or [email protected] Andy is an expert in the mortgage industry and has provided superb service for our clients for over 10 years.