How Much Money Do I Need to Buy a Home?
Aug 5, 2022
How Much Money Do I Need to Buy a Home?
Home affordability and tight housing markets have been making headlines for months, so much so that if you're thinking about buying, you might be wondering if you can truly afford to take the plunge right now. But before you count yourself out of the housing market entirely, take some time to learn just how much money you might need to buy a home.
HOW TO KNOW WHAT YOU CAN AFFORD
Conventional wisdom says that you can afford a home that is priced at 2 to 2.5 times the amount of your gross annual salary. Before you say to yourself, "Ugh! I can hardly get by as it is," remember that "gross" is the amount you earn before all the taxes, health insurance premiums, and other deductions come out of your paycheck. So, if you have an annual before-tax income of $50,000, you could expect to afford a home that is approximately $100,000 to $125,000.
It's true that some housing markets have become inflated, and if you have excessive debt, this might not be a reasonable estimate for you. But, chances are you can afford more home than you might realize.
OTHER FINANCIAL FACTORS TO CONSIDER
While a formula of twice your annual salary can give you a nice ballpark figure to get you started, the real answer to how much money you need to buy a home really depends on your current financial status and lifestyle.
Most financial experts will caution that your housing expenses should be no more than 30% of your monthly gross income. However, when you consider this figure as a homeowner, it's often quite different than when you consider it as a renter.
EXPENSES TO KEEP IN MIND
When determining your monthly housing costs as a homeowner, you're looking at more than just your mortgage payment. The mortgage, or amount you pay each month to pay back the loan you took out to purchase the home, is just one expense.
Typically, the monthly payment to your lender includes components such as your property taxes and homeowner's insurance. If you owe more than 20 percent of the value of your home, you might be required to take out private mortgage insurance until your loan-to-value drops below a certain threshold.
Remember, too, that as a homeowner you'll be responsible for the costs of utilities. When renting, some of these costs are often shared among multiple tenants and included in the cost of the rent, so they're easy to overlook. Another expense that can vary from neighborhood to neighborhood - but that can be quite high in some places - is homeowner's association fees.
PAYING YOUR DOWN PAYMENT AND CLOSING COSTS
Once you figure out how much house you can reasonably afford, the next question is how much cash you need to have on-hand to complete a sale. Years ago, a down payment of 20 percent was standard. So, young people starting out would save for several years until they could finally take the step towards homeownership. These days, though, if you have a good credit history and stable employment, you can often get a mortgage with a lower down payment.
This is good news, since you also have closing costs to consider, too. Sometimes buyers can negotiate the contract and get the sellers to cover a significant portion of these costs. But in more competitive housing markets like we're seeing now where buyers are making offers above asking price, getting sellers to pay for closing costs is more of a challenge!
HELP IS AVAILABLE
Many programs exist that help first time homebuyers and others who might not be able to afford a large down payment. A mortgage from the Federal Housing Administration (FHA), for example, or through other government programs, such as the Veterans Administration, often allow for much lower down payments. These programs typically require you to use the home as your primary residence. Some programs have income guidelines or limits on high the value of the property can be. Working with a reputable mortgage broker is sometimes the best. An experienced broker will be familiar with options available through many different lenders and can help you find the right loan for your situation.
Having a team of professionals by your side is critical when you're looking to buy a home. At Orizon Real Estate, our professional realtors can help guide you through the process and ensure you're in good hands at every stage. If you're looking to buy a home in northern Indiana, our knowledgeable team is ready to help! Call us today at 260-248-8961 to connect with an Orizon Real Estate agent.