Buying a new house is one of the most important milestones in life. But how do you know if you can afford that house you’ve been eyeing? A new house can serve as a solid foundation for your family, and it’s a big step to make in terms of finances. In Utah, loans and refinance services are readily available for every homeowner, but first, let’s talk about that fundamental question: Can you afford to buy a new home?
How much can you afford?
Use the 36% rule when determining the price of a house that you can afford. Simply put, 36% of your gross monthly income should be allotted for your monthly mortgage and other debt payments. For example, if you earn $6,000 per month, your monthly mortgage and debt payments combined should not exceed $2,160.
There are four factors that you should look into when determining your house budget, which are:
- Income – money received from a regular basis, such as from salary or existing investments
- Funds available – money that is available now to cover closing costs and the down payment for the house
- Debts and expenses – debt payments every month (credit cards, car payments, loans) and basic needs (food, utilities, clothes, etc.)
- Credit profile – this will determine how much money you can borrow and the interest rate you will be charged
Once you determine your working budget for a house, you can start working with real estate agents to find a suitable home under that price range.
Signs you can afford a house
Even if you really want that house at the end of the street with the gorgeous patio and classic Victorian windows, there’s nothing you can do if you can’t afford it. Apart from a house being outside of your budget, here are other signs you should not buy a house:
1. You can’t put a 20% down payment
If you can’t put a 20% down payment, your mortgage payments and interest rates will be considerably higher and can cost you more in the long run. Save up for a considerable down payment before buying a house.
2. You are going to be charged a higher interest
Borrowers that have a low credit score or a high amount of debts can be charged with higher interest rates by banks. If you are one of these risky borrowers, get your finances in order before buying a house.
3. The price of the house is nearing the maximum loanable amount
Don’t use the maximum amount that you can borrow as a guide to how much money you can spend on the house. Your expenses should not be anywhere near the maximum. Remember to stick to what you can afford to pay back.
4. Your debt-to-income ratio is high
If your debt-to-income ratio is more than 43% or near that value, you will have trouble having a loan approved. If this is the case for you, pay off other debts first and increase your income when possible.
Buying a new house is a big step, but it’s important to make sure you will still be financially stable after you get that house. There are two things you need to ensure first: your income can support all of your debt payments, and there are no indications that you cannot afford it.