Are you a first-time homebuyer wondering how much house you can afford? You’re not alone. Figuring out how much house you can buy is one of the essential steps in the home buying process — and it’s not all about how much you can qualify for in a mortgage. Aside from the mortgage, you’ll pay thousands of dollars out-of-pocket to get the deal done. Here’s what you need to know to determine how much house you can afford.
Current Market Trends and Location
The amount of residential real estate you can afford depends largely on the current market trends and the location you’re considering. Available inventory and highly sought-after locations heavily influence property values.
In a hot market, prices will rise by demand, and you may have to adjust your budget accordingly.
If you’re looking in a more rural area, you may find that the prices are more affordable.
Pre-Approval
A pre-approval letter from a mortgage lender is the only way to know how much money you’ll be able to borrow for your home mortgage loan.
Lenders will evaluate your financial situation. The evaluation includes your credit score, employment history, and income. You’ll then receive a pre-approval letter that states the maximum amount of money you’ll be able to borrow.
This letter gives you the peace of mind of knowing exactly how much house you can afford so you can narrow your search to homes within your price range.
If you’re making a cash offer on a home, you won’t need a pre-approval letter since you’ll already know how much money you have available. However, if you’re planning to finance your purchase with a loan, getting pre-approved is the only way to determine how much house you can afford.
An Earnest Money Deposit
An earnest money deposit is a deposit made by a buyer to show that they are serious about buying a property. The deposit is usually equal to 1-3% of the home’s purchase price. For example, if you buy a home for $200,000, your earnest money deposit would be between $2,000 and $6,000.
This deposit is an out-of-pocket expense that is not covered in your home mortgage loan. It is important to note that the earnest money deposit is not the same as a down payment.
Your Down Payment
The size of your down payment will directly impact how much house you can afford to buy.
If you pay less than 20% of the purchase price as a down payment, you may have to pay PMI, private mortgage insurance. This insurance policy protects the lender if you default on the loan.
The monthly premium for PMI varies, but it is typically 0.5% to 1% of the loan amount. As a result, if you purchase a $200,000 home and make a 3% down payment, your monthly PMI premium would be $500.
In addition to the monthly premium, there is a one-time upfront fee typically equal to 1% of the loan amount. So, in this example, the upfront fee would be $2,000. If you can make a larger down payment, you will avoid having to pay PMI.
In addition, a larger down payment may also allow you to qualify for a lower interest rate on your loan. As a result, it is vital to consider how much money you have available for a down payment when determining how much house your money can buy.
Closing Costs
Homebuyers usually finance their home purchase through a mortgage loan. Even still, additional costs are not included in the mortgage loan. These are called closing costs and can add up to a significant amount of money.
Closing costs are typically between 2-5% of the value of the home, so on a $200,000 house, you could be looking at $4,000-$10,000 in closing costs. This can be a big shock to many homebuyers who are not expecting it.
There are a variety of different types of closing costs, including fees for appraisal, loan origination, title insurance, and more. Some of these fees can be negotiated with the sellers, but others are set by the lender or required by state law.
In general, closing costs are not covered by the mortgage loan because they are considered to be part of the overall cost of buying a home.
Homeowners Association
A homeowners association is an organization that helps manage and maintain a community of homes. This can include tasks such as mowing lawns, shoveling snow, and managing common areas like playgrounds and swimming pools.
HOAs are often managed by a board of directors, who are elected by the community’s residents.
Being part of an HOA comes with certain costs. Most HOAs charge monthly or annual dues, which go towards maintaining the community. You may also be responsible for paying special assessments, which are one-time fees charged for major improvements or repairs.
It’s important to research an HOA before buying a home to make sure you can afford the associated costs.
Moving Expenses and Utility Deposits
When you’re trying to save money on your next property purchase, it’s important to factor in all of the potential costs – including moving expenses and utility deposits.
Moving expenses can include hiring a professional moving company, renting a moving truck, and paying for storage.
Utility deposits can also add up quickly, especially if you’re setting up new service contracts for electricity, gas, water, and trash. By taking all of these factors into account, you can be sure that you’re getting the most affordable property possible.
Conclusion
When you’re trying to figure out how much house you can afford, it’s important to consider all of the associated costs – including your down payment, closing costs, and moving expenses.
By taking all of these factors into account, you can be sure that you’re getting the most affordable property possible. Talk with your real estate agent for more information about how to gauge how much house you can afford to buy.
