To determine how much you can spend on a home, take a close look at your budget. Review your bank statements and spending habits for the last couple of months to figure out how much you are spending on everything from cellphone bills to streaming services to your weekly restaurant takeout. The Consumer Financial Protection Bureau offers a spending tracker that can help you figure out where your money is going each month.
Once you have a better picture of your spending habits, determine how much you want to allocate toward a monthly home payment. This figure includes your principal, interest, tax and insurance payment, which add up to your monthly mortgage sum.
The Federal Housing Administration formula, used by many lenders, recommends allocating no more than 31 percent of your monthly income to your housing payment. This figure will change based on your amount of debt. Buyers with no other debt may be able to budget as much as 40 percent of monthly income to housing. (But remember that the rest of your budget is going to have to go toward heat, water, electricity, routine home maintenance and food.) Over all, your total debt-to-income ratio, including car payments and credit card bills, should not exceed 43 percent.
So, for example, if you make $50,000 in annual gross income, your monthly gross income is $4,167. That should leave you with $1,292, or 31 percent to devote to your monthly mortgage, provided your overall debt does not exceed $1,792 a month. Our mortgage calculator can help you determine what your monthly mortgage may be — don’t forget to adjust the slider to match current interest rates, which can be checked here.
But remember that besides the mortgage, buying a home includes additional one-time payments that can quickly add up, including closing costs, legal fees and other expenses associated with buying, such as a house inspection. And don’t forget about moving fees or home improvements.
The pandemic is also raising the financial stakes on these costs for new homeowners: Because the housing market is so competitive, many buyers, in a bid to get a leg up, are now choosing to waive contingencies in order to have their offers accepted. Contingencies offer buyers an out if something unforeseen arises. They allow you to cancel a purchase if an inspector finds the need for significant home repairs, and to cancel or renegotiate deals if an independent home appraiser deems the home value to be significantly less than the purchase price. A mortgage contingency gives buyers the option of pulling out of the deal if they can’t obtain financing within a reasonable amount of time. And if you need to sell your current home to afford the new one, you should make your offer contingent on the sale of your own home.
By waiving them, buyers may get a leg up in the market but are also vulnerable to extra costs after the sale is completed. So proceed with extreme caution.