While buying a house is the ultimate dream for many, the process itself is surprisingly unpleasant. This is supposed to be a milestone we reach confidently, but the reality remains that it often starts with stress; stress about moving fast, about stretching your budget beyond what you expected, and about trusting numbers that never seem to be accurate.
In between ensuring you choose the right neighborhood and the right square footage, you forget to ask: How much will this really cost you every month, for years to come?
For the majority of people, a home is often the largest financial commitment they ever make. However, you are not just buying a roof over your head; you are buying a payment that will affect your stress levels, lifestyle, and whatever financial choices you can make in the future.
This is why knowing what you can truly afford might be the biggest piece of information behind buying a house.
Why Knowing What You Can Afford Comes First
You may think this is about playing it safe, but making sure you know what you can afford is so much more than that. The money you spend on that house will affect all your future decisions, so this decision cannot be one taken under excitement and social pressure.
A top mistake people often make is skipping or rushing through this step, and then anchoring their expectations beyond their pre-approval range.
You must step back when what you think about this number moves from “what’s right for me” to “How can I make this number work?” That is definitely wrong for a proper financial mindset.
Here, the power of decision-making shifts from buying a home that fits into your financial plans to your finances being ruled by the house you bought.
Putting a affordablity filter even before you start looking for houses is crucial. This helps you say no to tempting but expensive homes quickly, giving you a more realistic prospect.
Don’t fall into the trap of becoming “house poor,” when you live in your dream home, but can barely make the mortgage, let alone other expenses that are essential. Let’s explore a few steps to smart home buying that enable you to make the right decision for your finances and future life.
GP for aliensync.com
First Step: Understanding that Your Mortgage Pre-Approval Is Not Your Budget
When you get pre-approved, you get a number. That number can feel quite nice, because knowing that the bank is saying your finances can handle a bigger hit than you had thought is satisfying. However, don’t be fooled.
A bank is also a business. The more they lend you, the more they earn in interest. Banks act like they can help manage their finances, but you must remember that every consultant is there to make a profit for the bank itself, and it won’t always work out in your favor.
So, do not take that mortgage pre-approval at face value. Do the math for yourself. Look up a good home affordability calculator online, and it can help you understand where you stand by yourself.
How to Determine How Much to Spend on Your House
Your mortgage payment should not ruin your lifestyle and comfort. Here, you can consider the 5/20/30/40 rule for your home loan.
- The price of your home should be about five times your annual income.
- Aim to pay off mortgage within 20 years of purchase(faster if possible).
- The down payment should not be less than 30%.
- Your mortgage payment should not exceed 40% of your net monthly income.
Why the Mortgage Pre-Approval Figure is Not Accurate?
Following the rule and making the calculation can help you get a figure drastically different from that of a bank’s. Most lenders rely on two standard calculations.
The first is the mortgage payment ratio. This guideline says your monthly housing payment should not exceed 28 percent of your gross monthly income. If a household earns $100,000 per year before taxes, that works out to about $2,300 per month for a mortgage payment.
The second is the debt-to-income ratio, commonly called DTI. This looks at your total monthly debt obligations, including the future mortgage payment, car loans, student loans, and minimum credit card payments.
Lenders generally want this number to stay under 36 percent of gross income, though some will stretch higher. Using the same $100,000 household income example, that comes out to about $3,000 per month for all debt combined.
These formulas are not reckless. Financial professionals use them widely. The issue is not what they include, but what they leave out.
Banks do not account for childcare, groceries, utilities, insurance increases, home maintenance, or how you actually live. They do not care if you travel, support family members, or plan to save aggressively for retirement. They also do not consider how long you plan to stay in the home or how volatile your income might be.
Step Two: Calculating the Real Cost of Owning Your New Home
First thing you need to know, a mortgage payment is not the only cost of owning the home. When you buy a home, rest assured that there will be some work you will need to get done, like renovations and cosmetic updates, and that’s only the starting line.
If you are moving to a bigger house, all the utility bills are going to be higher. On top of that, if you are moving from apartments to a house, yard maintenance is also a new cost.
If you are going to live in planned communities, your homeowners association fees are also to be accounted for, and this is something that will only rise over the years.
A home is like a rather expensive pet: the longer you keep it, the higher the maintenance cost. You need to understand that you must keep funds ready for any crucial repairs and emergencies, like the breaking of appliances or fixtures, and other servicing needs centered around the house. People generally devote 1% percentage of the home value each year for maintenance, to ensure the property stays functional.
You also need to consider the property taxes and homeowners’ insurance, so make sure you get an accurate number for these while keeping in mind that these also increase according to the size of the property, and may increase even further down the line.
Step Three: Overview Your Budget Strictly
Once you come to a number, you need to understand that the number will only be feasible when all things are equal.
When you are a disciplined person, following a strict budget for one or two decades of your life is easy. But if you can get carried away with spending, you need to make sure there’s more cash available at hand to handle them.
You need to list all income sources and calculate what you earn on average per month. Then set apart every fixed expense. After that, you need to examine costs that change per month but are still crucial, like food, gas, and household purchases.
Once you get a figure for that, add to it some of the more discretionary costs, like dining out, movie nights, or other entertainment.
Once all the expenses are calculated, make a mandatory cut for savings, so that you stay cushioned, even when the situation is troublesome. This should also include your retirement savings. Additionally, while planning your budget, don’t forget to consider your overall health and lifestyle.
Once all your expenses are set, and you get a clear picture, only then you can set a house cost that you can afford with the mortgage.
Step Four: Try the Number Before You Purchase
For at least once a month, try to live on your projected budget. In real-time, you would see if you have room to breathe with this budget.
Take a deeper look at this way of living. Are you relying on bonuses, commissions, and overtime to make sure the numbers are working? Is it putting you in debt? Be strict and honest with yourself.
Remember that expenses only increase with time. You may have a child or two, you may get ill, you may have unprecedented things happen to you. It doesn’t matter how much you want the new house; what matters more is peace of mind and room to breathe.
Remember that the goal should never be to stretch the numbers as much as possible. Only go for a more realistic one that lets you live like a king in your new home.
Final Thoughts
When you go to a bank for a pre-mortgage assessment, they tell you what you can get. But what you can buy is not always what you can afford. Only you can figure out what you can live with in peace. The right house will fit into your life like a glove, without putting extra demands on your wallet.
If you make your decision based on a realistic calculation, you will live a happier life for the following years, and if your income increases overtime, you will be able to pay off your mortgage even faster, without living an uncomfortable life.
