When you’re looking to purchase a home, you may have many questions. Do I build a new home, purchase a used home, or consider buying a mobile home? The real question is just how much housing can you afford?
How Much Housing Can I Afford Rule of Thumb
Let’s face it everyone needs to stick to some type of budget. If you don’t, you’re just setting yourself up for a disaster. As soon as one, emergency bill, comes along you will find out how stressful life can be if you don’t budget. Why put yourself through it.
The typical rule of thumb is your house payment shouldn’t be more than 25% of your gross income. You want your total bills and house payment to be no more than 35% of your total gross income.
Remember, your home payment is also going to include insurance and taxes as well. You do not want these to be a surprise, so you want to make sure to figure these numbers in as well.
Buying a House vs. Renting
If you are currently renting a home and your goal is to purchase a stick-built home, you will want to save up. Most loans right now require a 20 – 25 percent down payment. Regardless of what the banks tell you that you qualify for you want to put together your own numbers on what you feel you can comfortably afford.
Finding a way to save 25% of the down payment will help you in the long run. That way you will always have a savings account built up in the home better known as equity. Having a down payment will also help you lower your payments on the home for example:
Let’s say you want to purchase a $150,000 home, which is an average investment right now for a stick-built home. If you save up and put 25% down which figures out to approximately $35,000. This will lower the amount that you are financing and in return lower your house payment.
Example Broken Down:
$150,000 home zero down at 4% = $716 payments per month
$150,000 home with 25% or $35k down at 4% now your payment is = $549 per month
Almost $170 in savings each month!! That doesn’t even factor in the interest that you will save on the home over the 30 years either.
Remember once you sign on your loan the monthly payment amount you are going to pay is set in stone unless you refinance. It won’t matter if you pay extra each month that only takes time off from the loan (rather than 30 years – 29 years of payments). So, try to find more money to put down on your home so you pay less each month! This will save you both interest and on having to pay higher payments.
Housing That You Can Afford Based on Income
Let’s face it we have all heard the phrase all work and no play… Do you really want to get into a home where you are going to be strapped to pay the payments? You want to have extra money to pay for toys and what if one of you loses your job. You want to be realistic, listen it’s easy to say this or that won’t happen to me, but life happens.
Buying a home should be a wonderful experience. A place of your own to raise your family. You don’t want to get into a home where the payments are going to strap you down for 30 plus years.
Money issues are the number one thing that married couples fight over. We should focus more time on our purchases that we make so that we don’t get ourselves into situations where money is going to be a concern. I know I don’t want to be worrying for the next 30 years on how I am going to pay my mortgage and you shouldn’t either.
Sit down together and figure our how much money you bring in. You don’t want to go by your gross pay but by what you actually bring home. Then you want to figure out your bills that you currently pay and subtract those from your bring home money.
Average bring home pay: $5,000 (combined)
Credit Card Bills: $100
Power Bill: $120
Internet / TV Bill: $50
Car payments and insurance: $400
Living Expenses: food / gas / heat / clothing: $500
$1170 a month just in typical living expenses
Now to fall within the 35% figure we discussed earlier you could afford around $600 for a house payment using this math.
How Much Housing Can I Afford: Pay Bills Down
Let’s say you run the figures above and it is leaving you very little for housing. One possibility would be to pay off a credit card. If you can find a home that fits your needs and you can pay off the credit card with some of the down payment money it would give you extra money. This would free up $100 per month based on the example above.
A much better option would be to pay off the credit card in full before you look at buying a home. Be sure to cut up the credit cards once you have paid them off. Credit cards carry high interest rates and can get you into trouble quickly. If you do not have the cash to buy something, then wait until you do. Getting into debt is not a good idea.
Buying a Home: Closing Costs
Don’t forget closing costs when it comes to purchasing a home. They typically run around 4% of the purchase price of your home. Closing costs would include appraisals, title insurance, inspections all these little items add up and can add thousands to the final price tag.
Many times, you can get the seller to pay part of the closing costs, this is a normal request, but you still need to budget for your end of the costs.
Housing: HOA and hidden fees
If you are moving into a subdivision remember you want to make sure you are aware of all the fees you will be responsible for. HOA fees can be expensive each month. On average HOA fees figure out to $200 / mnth. Plus, many HOA communities have other expenses because they require certain things from your home each month. They require that you keep your lawn maintained, that you keep your home looking presentable from the outside. These fees can all add up so be sure to read the fine print.
Another thing to consider is how long you and your spouse have been at your current job. Just because you have been at a job 6 months to a year doesn’t mean it’s the career that you want to stay at the rest of your life. It’s OK to put a home purchase off to make sure you are secure in your work environment. You do not want to get into a home payment only to discover your job is making you miserable.
Not all Housing is the Same
Stick built homes tend to appreciate quicker then mobile homes. Mobile homes tend to go down in value unless attached to a piece of land. Mobile homes because they are affordable housing sometimes sell quicker, however. Mobile homes are great if you do not plan to stay in the home for over 5 years because they are a fraction of the cost of stick-built homes. That brings me to our next subject
Housing: 5 Year of Less
If you do plan to stay in a home 5 years of less or there is the possibility of that, maybe a used mobile home is the answer. You can get into a used mobile home affordably and you will probably pay more towards the principal because there is less financed. Many times, you can purchase these used units for cash they are so affordable.
With a stick-built home within 5 years you’re probably paying most of the payment towards interest. Which means in 5 years you will still owe the same amount. Unless you do significant repairs to the home you might find yourself even upside down.
Living in a used mobile home will give you time to save money to put towards the stick-built home of your dreams.
I have many clients that purchase a piece of land and put a used mobile home on it. They then pay on the land until it is paid in full and then build the home of their dreams while living in the used mobile home. Once the home is built, they simply move the used mobile home.
Budgeting Your Money for a New Home
Here’s some suggestions to alleviate the stress in your life when it comes to budgeting for a home. You should always have $1,000 tucked away for any type of emergency before purchasing a home. This $1,000 emergency fund isn’t for broken furniture or a new TV set that just went on sale. It is for real life emergencies like the alternator going out on your vehicle. If you can’t get to work, you can’t make money to pay your bills. That is an emergency. If you do have to tap into your emergency fund your first goal should be to put the money back. Always have that $1,000 in emergency funds to help you through.
It is also smart to have money stored away to cover your bills for at least a six-month period. That way if you or your spouse loses your job you have time to find a new one. You don’t want to live paycheck to paycheck because one small emergency can be a disaster that spins out of control quickly.
For more financial ideas check out this book by Dave Ramsey Total Money Makeover. For the price it is well worth reading it!
How Much Square Foot Area Do I Need?
Yes, a very large home is nice but is it worth it? You need to set goals when it comes to the type of home that you want to purchase as well. How many bedrooms will you need? How many bathrooms? 3-bedroom 2 bath homes are typical and they also have a great resale value. Most buyers have a husband and wife and two children.
If you need more room figure out how much. Remember you will have to heat, cool and pay electrical per square foot plus there are always repairs that will be needed. It can be very time-consuming cleaning a large home as well and that is tough if you are both working. Simplify your life and make a calculated decision.
It also cost quite a bit to furnish and decorate rooms so be sure that you aren’t over buying the home that you need.
To figure out the square foot area of a mobile home visit our blog: How to Measure A Mobile Home
How Much House Can I Afford: Pay it Off Early
There are ways to pay your mortgage off early. If you go for a 30-year mortgage you are going to have a much more affordable payment but the interest you will pay over the 30 years is stifling. Lets look at a couple options:
Take the 30-year payment and pay it off in 15 years. Pay bi – weekly have the payment taken out of your checking / savings account
How Much Home Can I Afford VA Loans
First of all, if you qualify for a VA loan I want to personally “Thank You” for your service. VA loans have great interest rates, typically better than most loans on the market.
Remember: Please don’t let a bank tell you what you can afford – BUDGET your money out – You figure out what you can afford so you feel comfortable. It is great to have a bank figure out a number that you qualify for but don’t let that be the number you use to decide on the home that you want.
Home Loan Options
There are so many different loan options available and they change daily. It is best to get in touch with a mortgage specialist that can walk you through the different loans you would qualify for.
If you are interested in a loan for your home and you are not sure how much you would qualify for be sure to visit this link. Fill out your information to have a specialist contact you today!
Housing You Can Afford: Repairs and Improvements
Realize that when it comes to housing all homes need repairs. It doesn’t matter if the home is brand new, in which case it should have some set warranty. In most cases however you must realize that most homes need 1% – 2% of the homes value in repairs each year. These repairs can range from furnaces, to leaky roofs and pipes, to a dishwasher going bad. Homes are expensive to maintain.
You will want to make sure to have some type of emergency fund set up to help you through these unforeseen problems.
Realize that this doesn’t include all the improvements that you want to make to your dream home as well. A new deck, new windows a new garage all these costs stack up.
In conclusion, knowing how much home you can afford really comes down to a few things. You must make a calculated decision based on your financial status, what your bank will allow you to finance and also what type of home you need. You must run the numbers and see what works for you and your family.