How Much Can You Afford?
You’ll need to answer this before you start looking at property and start shopping for a loan.
An easy way to do this to play with this handy tool from Freddie Mac.
The reasons for affordability calculations are twofold. First, you don’t want to waste time looking at houses you can’t afford. It’s better to start looking properties at or below the bottom of your price range and work your way up. Second, your lender may indicate you could afford more house than you may be comfortable. They’ll ask for detailed financial information when you apply but they may not uncover every expense such grocery expenses, gas, travel, health insurance, hobbies, entertainment, etc.
The following steps will help:
- List all sources of income and determine the amount after taxes.
- List all your recurring expenses (bills you pay every month such as car payments, student loans, utilities and insurance.)
- Estimate all other monthly expenses for items such as food, gas, utilities, recreation, etc.
- List the new expenses that you may have as a homeowner. These expenses will depend on the type of property. For example, a condo may have a homeowners’ association (HOA) fee to fund common area maintenance and improvements. Other expenses include property taxes, insurance and home improvement projects. If you’re moving farther from where you work, your transportation costs may increase.
- Determine how much is left over.
When you make this final calculation don’t forget to leave room to save for emergencies, retirement and whatever else you have in your financial plan.