First-time homebuyer? Upsizing? Buying a second or vacation home? Downsizing? No matter your home-buying aspiration, the first question you’ll always need to ask yourself is, how can I buy the home I want? The six steps covered in this home affordability checklist can help answer that question. When you take the time to find out how much home you can really afford you’ll find it’s easier to make the many subsequent decisions on when and where to buy your dream home. Check off these steps first and you’ll be ready to take the big home investment leap.
Determine Your Total Annual Income
Your first step to check off on the home affordability list is to accurately determine what your annual income was for the previous full year. To do that you find the sum total of your gross income, before taxes or other deductions, and you add to that any potential future bonuses you might expect to receive and/or any other income sources you may have. If you are buying the house with a spouse or partner, for example as joints tenants, or with another person, perhaps as tenants in common, add their annual income as well to determine sum total annual income.
Learn Why Prequalification Matters
Why should you determine your total annual income? Because when you’re ready to shop for a home it’s best to get prequalified. Annual income affects how much home you can qualify for-- a mortgage lender looks at your complete financial picture and qualifies you for a mortgage based on that picture. In addition to annual income, a lender will look at the savings you have and what debts you owe. You are prequalified or preapproved for a loan based on all of those numbers.
Calculate Your Down Payment
In this step determine the total amount of money you can put down on a home purchase. Home affordability should not lead to home impoverishment, so don’t commit all of your funds to your down payment. You need to protect your financial health from unforeseen hits to your income during and after the home buying process. Lenders typically want a 20% down payment to buy a home, but if that’s a high hurdle where you are looking to buy, shop around. Many lenders have options and can work with you to find the right loan, depending on your credit score and other factors.
Understand Typical Closing Costs in Your State
Do research in your area on typical closing costs in dollars. Closing costs may include appraisal and inspection fees, underwriting, processing, application, and credit report costs, brokerage and attorney fees, and more. You can negotiate these fees, sometimes with your lender, or with the home seller. Knowing what to expect in closing costs helps you avoid surprises. Nationally, closing costs run between 2% and 5% of the total home purchase price so use that as a guideline as well where you are shopping.
Calculate Your Expected Mortgage Payment
Online mortgage calculators abound and are great tools for assessing your likely monthly mortgage payment. The payment will depend on current interest rates, down payment amount, term of loan, and other factors. Be sure you account for homeowner insurance payments, property taxes, escrow funds, and potentially, mortgage insurance in your payment calculation.
Add Up the Cost of Your Household Bills and Other Debts
Are you paying a student loan? Medical bills? Car payments? Childcare? Many of the monthly bills you pay impact your ability to both get a mortgage, and take on a mortgage payment. Knowing the total sum of your current debts, and forecasting future potential debts can help you be both realistic about how much home you can afford, and help in prequalifying you for a loan.
Do you have money to repair home systems and appliances?
Have you been renting a place with someone, or maybe saving up a down payment by living with parents? If so, you may not have had to deal with the hassles of an appliance or home system breaking down and/or paying the often costly repair bill. Keep in mind that everything you calculate as money you need before your home purchase won’t matter if you can’t afford to pay to fix something after you move into your new home.
When you buy a home you take on the responsibility for finding the right contractors and paying for any problems yourself. Having savings for the unexpected helps, but having a home warranty to cover repair or replacement of covered systems and appliances also helps protect your budget, particularly for first-time homeowners who can be house poor in those first years of homeownership.