Buying a home, especially for the first time, can be an exciting process. However, it will inevitably also be a stressful experience. One of the first things you will need to determine is what price of home you can afford. Especially since the recent mortgage industry implosion, responsible borrowing is an important part of buying a home. This means buying a home you can afford. It is easy for home seekers to get out of control and over budget.
There is no set of rules for what a person can afford. Ideally, every person would be able to buy a home outright. However, most people do not have this luxury. Fortunately mortgages exist to help people finance and eventually own their homes.
Determining a Price
The general rule of thumb is to keep your housing costs to less than one-third of your expenses. Research mortgage interest rates that you qualify for and work out what cost of a home you can afford. Make sure to work in the costs of homeowners insurance and maintenance fees into the total housing costs.
When you are determining what price of a home you can afford you also need to consider other factors. If you have a lot of debt, you need to debate whether you can afford to take on a mortgage. A great amount of debt also has consequences on your credit score. If your credit score is low, you will likely not qualify for low interest rates. In the worst of cases, you may not be able to qualify for a reasonable mortgage loan at all. It is not advisable to try to buy a home with a large amount of debt or with high interest rates. Instead you should put off owning a home temporarily while focusing your efforts on repaying your debts and improving you credit score. This will put you in a more favorable position when you eventually do proceed to own a home.
There is another general rule of thumb to use in trying to determine a price range for your future home. Calculate your total annual household income, multiplied 2.5 times. For example, if your total annual household income is $100,000, you should be looking for a home that is $250,000. This may seem unreasonable, especially in areas of the country that have high costs of living, but it is a responsible approximate estimation.
Affording a Mortgage
Most financial institutions and mortgage lenders require a significant down payment on a home. This is usually about 20-25% of the home’s cost. If you are looking for a home that is $250,000, this would mean a required down payment of at least $50,000. If you are unable to make this significant of a down payment, you may be required to attain private mortgage insurance in order to qualify for a mortgage. Some financial institutions have mortgage programs that bypass the down payment.
It is important to be reasonable and responsible when looking for a home. Going beyond your means will put a great strain on your finances.