How much home can you afford? There are calculators that claim they can tell you. Your lender also will have an estimate. The only way to get the full picture, however, is to do the math yourself. You are the only person who has full insight into what your day-to-day finances truly look like.
Calculating a Budget
To figure out how much home you can afford, you need to add up all of your existing and expected expenses after buying a home. Then, you need to compare these to your income to make sure you would not be overspending.
Taxes
Lenders consider your gross income when determining what you can afford. But as the person shopping for a home, you cannot overlook the cost of your income taxes. They may be one of the largest expenses you pay. For many people, they may even be the largest.
So, for instance, let’s say you make $7,000, and you pay around $1,800 in taxes each month. You can’t treat that $7,000 like all of it is going to be available to you when you budget. You really will have closer to $5,000 to work with.
Home-Related Expenses
Here are the costs you will need to budget for each month that directly relate to being a homeowner:
- Mortgage payments (and interest)
- Mortgage insurance
- Homeowners insurance
- Property taxes
- Utilities
- Maintenance and repairs
- HOA fees
A lot of people only think about the mortgage as they are shopping around. But you need to add together all of these costs. Note that if you put down 20% or more, however, or if you take out a VA loan, then you may not need mortgage insurance. You cannot avoid getting homeowners insurance, however.
Also, note that some of these costs have the potential to increase over time. HOA fees can go up, property taxes can increase, insurance rates can also climb, etc. You need to think about the long term while budgeting.
Regarding maintenance and repairs, it’s true that you will not have expenses in this category every month. But every month, you should set money aside for it. At the end of the month, if you haven’t spent that money on repairs or maintenance, you should keep it separate from the rest of your funds. Eventually, there will be a large repair bill, and you will use that money to pay for it.
Existing Debts
You might be able to pay down some debts before you buy a house. Doing so is a good way to improve your debt-to-income (DTI) ratio. That is one of the metrics that lenders look at when deciding whether to qualify you for a mortgage.
But you probably are still going to carry some of those debts forward after you move into your new home. So, they will be part of your ongoing budget. Examples include:
- Student loan debt
- Medical debt
- Personal loans
- Credit card balances
- Any other mortgages you have
- Car payments
You might have other debts as well. Factor in the monthly payments for all of them when you calculate your budget.
Other Expenses
The biggest category of expenses that people may forget about when calculating how much home they can afford is anything that is not classified as a debt. Just because something isn’t a debt, that does not mean you can ignore it. Some of your most significant monthly costs are likely in this category.
Ongoing
- Groceries
- Hygiene and personal items
- Household supplies
- Gas and automotive expenses
- Auto insurance
- Health insurance
- Other routine healthcare costs (i.e. prescriptions, supplements)
- Childcare
- Money you put toward savings and investments
Sporadic
- Automotive repairs
- Healthcare costs for acute conditions, etc.
- Other supply costs
You probably also are going to want at least some small entertainment budget.
Always Crunch the Numbers Yourself
This post has given you a checklist to help you figure out your budget when you are shopping for a home. But there may be items on your list that are not in this post, as well as others that are in this post that do not apply to you.
Regardless, you need to do the math to figure out how much room you realistically have in your monthly budget for all the expenses that go with owning a home, not just the mortgage payments.
Remember that over time, many expenses will grow due to inflation, home values potentially going up, and other factors. Your salary may or may not increase, depending on your industry and situation. So, build in some buffer not only for the unexpected, but also for the additional financial weight of a more expensive future.
Taking these precautions will help you to buy a home you can afford today, and years from now.
Buy a Home in Blacksburg or Beyond
First Residential Mortgage is based in Blacksburg. We can help you buy a home or refinance in Blacksburg or anywhere in Virginia. To get started, please call (540) 838-5868 to schedule your consultation.
