How much house can you actually afford?
It’s a good question, and it’s probably something that you think your mortgage company will answer for you! If you get approved for $500,000, you look for a $500,000 house, right?
Not so fast! The answer is much more complicated than the maximum mortgage for which you get approved.
While your total mortgage amount and your monthly payments are a critical number, there are a lot of costs that may not be accounted for.
The 28/36 Rule
The 28/36 rule is pretty simple, but it’s not perfect — like a lot of other “rules” for financial wellness.
Here’s what it means:
- No more than 28% of your gross income (the amount before taxes and deductions) should be used on housing expenses, including your mortgage payment (principal and interest), property taxes, HOA fees and homeowner’s insurance.
- And, no more than 36% of your gross income should go to all of your debt combined, including all the things in the 28% above plus your credit cards, car loans, student loans and other loans.
This rule is helpful because it can prevent you from becoming “house poor,” which is when too much of your income goes toward housing expenses. If most of your paycheck is going toward your mortgage, insurance, taxes and HOA fees, and you struggle to pay for utilities, food and save for retirement and other needs, you’re “house poor.”
Where does this rule fall apart? The weak point of this rule is that it uses gross income, not your take-home pay. After taxes, health insurance and retirement contributions, your gross income can feel pretty low. This rule doesn’t account for normal expenses, like groceries, utilities, child care costs and other necessary expenses. Plus, in high-cost areas (like Northern Virginia), it may not account for your personal goals, like travel and vacations.
Here’s a guide to all the financial factors that you need to consider when you think about buying a home this spring or summer — particularly if you’re going from a rental to a purchase!
Repairs
If you’ve been renting, it’s probably been fairly easy to request repairs — a new water heater, a new dishwasher and other things as they come up. And your landlord has also been responsible for repairs to the roof, too. Unfortunately, as a property owner, those items will be your responsibility! It’s a really good idea to get a full inspection of the property you’re considering buying so you know what you’ll need to replace, and when. That way, you can start saving up for those issues and factor them into your total budget.
Utilities
Many apartment rents include at least some utilities. When you own a home, the utilities are your responsibility. You can ask your Realtor for previous utilities statements from the owners to help you adjust your budget to include electricity, gas and water.
Fees
Are you buying a home that’s in a neighborhood with a Home Owner’s Association (HOA)? That’s another cost you’ll need to factor in.
Taxes
If you’re buying a property, chances are you’ll have to pay property taxes to your city or county. It’s really important to find out how much taxes are on the property you’re purchasing, and work that into your calculations.
Insurance
Lots of people have renter’s insurance, but homeowner’s insurance can be more expensive because it’s not only covering your possessions, it’s also covering the structure. Talk to a few different insurance companies to make sure you’re covered and shop around for the best rates.
So, how much house can you afford? It might be lower than you think, but that doesn’t mean you need to be discouraged! We’re here for you and for all the phases of your housing journey. Just message us through online banking to set up an appointment with one of our mortgage specialists, who can walk you through all the costs associated with buying a home.
Home purchases are still one of the best ways to generate wealth, and we’d love to help you get there. Let us know how we can help you go from renting to buying in a way that’s financially responsible and sustainable. Contact us today!
