How Much Home Can I Afford?

Dated: May 6 2022

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When buying a home it is important to decide what you want in a home. However, first and foremost, it is most important to decide HOW MUCH home you can afford! This article will focus on tips and tricks as well as basic knowledge of mortgage and affordability when purchasing a home.

The journey of home buying can seem like the biggest hurdle one can face in their life. For some it truly is. Packing up and moving you life is a daunting task and so are the desicions that come with it. But how can you decide on the perfect home when you don't know how much of one you can afford?

Step 1: Realize How Much You Can Afford

Typically, if you are paying an entire purchase price in cash, there is no other steps needed aside from the closing process. There is only one major difference between someone that can outright buy a home with cash and someone who needs a loan; the lending process. For those that do not have the purchase price of the home in their pocket, the lending process will be the first step you take in deciding how much you are able to look for. 

Typically known as the preapproval process, the initial quote that you receive from your preferred lender will tell you how much you are able to take from that particular place. Of course it is always beneficial to 'shop around' and get multiple quotes. However, the basis of preapproval is a debt-to-income analysis that calculates how much you can afford based on how much you make and how muchn debt you have (and how frequently you pay that debt off).

Step 2: Take Inventory on Your Cash-At-Hand

You are officially preapproved. That's amazing! Now you can start looking at homes up to your limit..... or is that the best idea?

Let's say that you are preapproved for a home loan up to $350,000. While it is incredible to know that you can afford this on a month-to-month basis, it is equally important to understand the money that it will take to close on a home at this price range as well. Typically, closing costs can range between 3-5% for buyers and sellers. This is absolutley CRUCIAL to keep in mind since that percentage is coming from your bank account.

So, because of the extra costs that come into pay when considering a home, it is important to realize what ash you have at hand when paying for fees and costs at the closing table. Perhaps you have enough money to close on a home that is $25,000 less, and that is okay! It is more beneficial to know where your level of comfort is instead of your max level of loan borrowing could be. 

Step 3: Rates, Refis, Battlestar Galactica

Have you ever gotten a preapproval and waited several months, or even years, only to see that your new preapproval is different from the last? What could have changed? Do you owe less or more debt? Are you making more or less income? Or, above all and the most common culprit..... did rates change?

A rate is a percentage on a loan that is charged to you on the principle. In other words, the rate is the monthly addition that the loan company charges you on top of what you originally borrowed (they gotta make it somehow... I guess...). 

The rate can dictate how much you can afford because it adds against how much money you make and into your hypothetical debt. Rate is an addition of debt that you take on when purchasing a loan. A lower rate allows for a higher price range in a mortgage preapproval whereas a higher rate lowers that mortgage preapproval range. 

What happens when you take a mortgage at a high mortgage rate? Are you stuck paying that rate forever until you sell the home or pay it off? The answer is no. Refinancing a loan can be a good future plan to help secure a house now in a competitive market while also planning to help save moeny in the future.

By taking the higher rate mortgage now you are able to secure a home. This is great in high demand markets where inventory is low. The refinance option then allows you to come back in time and lower the rate at a fee cost.

Word of Warning: IF you are accepting government funded assistance programs that help in downpayment assistance, you may not be able to refinance without paying bacck the assistance. Programs such as OHFA and FHA have penalties that require you to pay back the assistance before refinancing.

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Ryan Giavasis

Ryan Giavasis began his real estate endeavor as a remedy towards solving his own financial freedom. Looking for financial autonomy and independence, Ryan searched and studied everything real estate an....

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