Home Payment Comfort Level: More Important Than How Much You Can Afford?
The lure of homeownership is pulling new buyers into the market daily.
Low mortgage rates and still-affordable home prices are making it easier for first-time home buyers to break into the market.
Today, about one in three home purchases nationwide are completed by those who have never purchased a home before, according to the National Association of REALTORS® (NAR).
These are some of the most well-equipped buyers in history.
They have access to information about almost every home listed for sale. It’s no wonder that 90 percent of all buyers search online for homes at some point in their process, according to NAR.
Still, online searches and calculators can’t tell you everything. First-time buyers often wonder how much they can afford.
The better question might be, how much is the home buyer comfortable paying?
There are a few different ways to approach this question. That’s a good thing. Buyers can cross-check using different criteria to arrive at the best decision.
The multi-faceted approach can help buyers make a confident home purchase and comfortably afford their home long-term.Verify your new rate (Feb 16th, 2019)
Examine Multiple Home Affordability Models
There is no “right” way to find out how much you can afford. Rather, look at it from many perspectives to get a good feel for your ideal price range.
For instance, the lender might say your maximum purchase price is $350,000. Yet that would require a mortgage payment twice what you pay in rent. In this case, you might choose a lower home price, though you could qualify for more.
Here are some of the most common methods by which new buyers employ checks and balances to see how much they can afford.
Consider Your Lender’s Maximum Price Calculation
An easy way to check the most house you can buy is to let your lender do it for you.
The loan officer will determine your maximum purchase price based on your credit, income, debts, and downpayment amount.
It is useful to know what you can qualify for, but it may not be in your best interest to buy a home in the lender’s maximum range. Here is an example.
The lender could approve you for total debt payments of up to 43 percent of your gross income. The payments would include your future mortgage payment, student loans, credit cards, and other debts.
Someone making $5,000 per month could be approved to pay up to $2,150 per month in required payments.
Yet you know your take-home pay is only $4,200. Also, you would like to start contributing to a savings account to the tune of $500 per month.
The lender’s maximum leaves you with only about fifteen hundred dollars per month for life’s other expenses. Some buyers would be happy living on this amount. Others would want to buy a less-expensive home for more breathing room in their budget.
In short, the lender’s maximum does not take into consideration your lifestyle or other financial goals. Consider the lender’s maximum, but the next necessary step is determining your payment comfort level.Verify your new rate (Feb 16th, 2019)
Work Backward From Your Comfortable Home Payment
Owning a home does not have to be stressful.
If you buy a home the right way, making your mortgage payment each month should feel no different than paying rent.
The first step to a low-stress homeownership experience is calculating what housing payment you will be comfortable with.
A good place to start is your current rent payment. That is the bulk of your new home payment, and you are already doing it.
Next, determine any unnecessary expenses in your budget. Record your spending each month with online budgeting software.
Take steps to cut out non-essential costs so you can add them to your maximum future payment. This strategy will help you buy more house that will suit your needs longer.
With your comfortable home payment in hand, contact a mortgage lender. Give the loan officer your maximum payment; he or she will factor in all aspects of your future home payment like taxes, homeowner’s insurance, and private mortgage insurance (PMI).
The lender will use current mortgage rates to calculate principal and interest portion of your payment.
For example, your comfortable home payment is $1,500.
- Estimated taxes of $200 per month
- Estimated homeowner’s insurance of $60 per month
- PMI of $150 per month
The above assumptions leave nearly eleven hundred dollars for the principal and interest portion of the payment. Your down payment amount and current mortgage rates would then be brought into the calculation to yield your comfortable home price.Verify your new rate (Feb 16th, 2019)
No-Lifestyle-Change Home Buying
The most comfortable kind of home buying is that which requires no lifestyle change at all.
A surprising number of buyers are in this category.
A 2015 NAR survey polled home buyers with student debt. Even though they had that extra expense, only half of them cut spending on luxury items and non-essentials to buy a home.
In some markets, renters are able to buy a home for the same amount — or even less — than it costs to rent. These fortunate buyers need to make little to no adjustments in their lifestyle.
It is wise to budget, cut costs, and create a financial cushion for your upcoming purchase. However, many buyers are able to comfortably own a home without sacrificing small conveniences and the occasional indulgence.
When Your Comfortable Payment Exceeds The Lender’s Assessment
In the end, your lender will ultimately decide exactly what size mortgage for which you can qualify. You may be comfortable with a higher payment than the lender says you should take on.
The lender has the final say on how much you can buy, and that is not a bad thing.
Years of data have gone into established lending limits. If the lender sets a lower payment maximum than you think you can handle, their number is the wiser choice, statistically.
Doing your homework in advance helps you come into the situation with realistic expectations so that the lender’s maximum payment will not be a surprise.
With mortgage rates low and more renters looking to purchase homes, now is a great time to start the due diligence process and figure out what price range will work best for you in the current market.
What Are Today’s Rates?
It is a great time to be a home buyer. Mortgage rates are low and that means your comfortable monthly payment will yield more house.
Get a live estimate on how much home you can afford, with no obligation and no social security number required to start.Verify your new rate (Feb 16th, 2019)