I see this happen all the time. A young couple starts house hunting and at first they’re very disciplined. They only look at homes they feel they can afford – let’s say in the $100,000 price range.
Along the way, though, they pop into a few homes priced in the $150,000 - $200,000 range. You know, just to see what they might be like.
Then, when they get back to homes in their price range, they feel a bit deflated. What they can afford no longer feels nice to them, and they begin rationalizing ways they can afford the more expensive home. That’s a trap. And it’s a trap I try to help all of my first-time home buyers avoid.
Three Key Factors for Determining Affordability
If you really want to understand what you can afford, you need to take an honest look at your finances from different points of view.
1. How much debt do you have?
Your total monthly debt (mortgage loan, auto loan, credit card and other debt) should be about 35% to 40% of your monthly gross income. That’s a good rule of thumb to keep you from overbuying.
2. How much have you saved for the down payment?
If you’re able to put 10% or more down, that’s a good sign that your new home is in your price range.What about your cash reserves?
3. Did you put all of your cash into the down payment, or will you have money left over after you’ve moved into your new home?
As a test of affordability, you should have at least three to six months of living expenses still in reserve.
I like helping people get into their first home, but I also want them to enjoy a sense of stability and financial security. That’s why I don’t rely on one single formula for helping them figure out affordability. It’s always best to look at the whole picture.
First-Time Home Buyer’s Guide
If you’re thinking about buying your first home, a great place to start is with our First-Time Home Buyer’s Guide, which provides all sorts of advice, tools and tips for the home buying journey. It will give you a clear picture of what to expect all along the way. View or download the guide today for the information you need to make a sound financial decision.
Jan Stoldorf is a Vice President at Heartland Bank and serves as the Branch President of the Geneva and Shickley Branch. She has been an associate at Heartland Bank since 2002.
