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Buyer Guide: How Much House Can I Afford?

by | Apr 26, 2024 | Buying, Market Stats

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The idea of purchasing a home ignites both excitement and nerves for many people. With so many financial pieces of the puzzle, first-time buyers often feel swamped. The resounding question in the minds of hopeful homeowners is straightforward but timeless: How much house can I afford?

Explore this in-depth guide to better understand this financial decision and lay out a straightforward path to homeownership. Whether you’re weighing down payment possibilities or considering your monthly expenses, we’re by your side as you start your real estate journey.

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How Can I Afford a House?

Owning a home is a fundamental aspect of the American Dream, yet translating that dream into reality can feel daunting. Assessing your financial well-being is a great first step in gauging your ability to afford a house. Prior to viewing potential homes (and potentially getting attached), it’s crucial to thoroughly evaluate your debt-to-income ratio and credit score.

Self-Evaluation Checklist

Consider the following to set the groundwork for your homebuying plan:

  • Net Monthly Income: This amount will help you determine how a monthly mortgage payment fits into your budget.
  • Existing Debt: Anything you currently owe, such as student loans or car payments, will be factored in to a lender’s decision on what amount they’ll offer you.
  • Emergency Fund: Experts suggest saving enough to cover 3-6 months worth of expenses in case any unforeseen circumstances crop up.
  • Credit Score: A low credit score may disqualify you from a mortgage or cause your payments to be much higher.
  • Employment Status: A consistent work history demonstrates reliability to lenders. Note: switching jobs will likely not impact this as long as you have your work history documented.

By taking a long look at these factors, you’ll get a clearer view on whether you should buy soon or take the time to strengthen your financials.

How Can I Afford a Down Payment?

A down payment can be a big hurdle for first-time home buyers and veterans alike. You might think you’ll need 20% of the home’s price, but that’s often not the case. Many conventional loans only require 3% down, with some special programs offering 0% down. There are also programs (which vary by area) that buyers can take advantage of.

The Trelora Buyer Rebate

To make home ownership a reality for even more people, Trelora recently rolled out the Trelora Buyer Rebate

When you sign an agency agreement with Trelora, half of the commission offered to the buyer’s agent is given back to you at closing. So, if the seller’s agent offers 3% on a $500,000 home, you get back 1.5% ($7,500) after closing. 

Learn More

Down Payment Assistance Programs

If you’re having trouble saving up for a down payment, a down payment assistance (DPA) program could be the solution. Governments, nonprofits, and employer-backed programs might provide help to eligible buyers.

More Strategies to Consider

  • Consider Other Assets: Many individuals will take from investment accounts to afford a down payment. However, if you’re taking from a 401(k) or similar, you should speak with a financial advisor to weigh the benefits vs. implications.
  • Gifts from Loved Ones: It’s legal for your down payment to come from another party—so if you have a well-off family member who wants to contribute, they can.
  • Bring in a Cosigner: If your financials are still a bit rocky—such as a sub-optimal credit score—having a cosigner can help you get approved and lower your overall payments.

By considering all potential options, many people find they can come up with a down payment that they had previously thought impossible.

What Can I Afford to Pay Monthly?

Apart from the down payment, it’s important to figure out what payment amount you can handle every month. Your monthly payment isn’t just for the mortgage—it includes property taxes, insurance, HOA fees (if needed), and PMI (required mortgage insurance for if you put down less than 20%). 

What is the 28/36 Rule?

Financial advisors often mention the 28/36 rule as a handy guide for how much home you can afford. This widely-recognized rule suggests not spending more than 28% of your gross monthly income on housing costs and keeping your total debt, including your mortgage, under 36% of your gross monthly income.

How to use this rule:

  • Calculate your 28 percent: You should aim to keep your total housing expenses under 28% of your gross income.
  • Calculate your 36 percent: On top of your housing expenses, add in any other monthly debts you have here.

Using the 28/36 rule is a good measure to make sure you’re living financially healthy. Though it’s not always possible, it’s something to strive for.

Try out a Mortgage Calculator

Mortgage calculators can be extremely helpful if you’re looking to buy a home. They give quick monthly payment estimates and can be adjusted based on interest rates, loan terms, and more.

Tailor Your Calculations

  • Purchase Price and Down Payment Amount: Your mortgage payments will vary based on how much you borrow.
  • Mortgage Length: Naturally, the amount of time you have to pay back your loan will impact how much you’ll pay monthly. It’ll also impact how much you end up paying in interest.
  • Interest Rate: It’s no secret that interest rates have fluctuated a lot overy the past few years. Even a seemingly small change in rate can have a massive impact on your monthly payments. Rates can vary between lenders, so it’s smart to shop around before committing.

Chat With a Professional

The best advice usually comes from an experienced pro who can customize their suggestions to fit your financial situation. These consults are generally free of charge!

Seek out a Trusted Advisor

  • Chat with a Lender: A good lender is worth their weight in gold, ensuring you get the best rates and terms. They are also usually knowledgeable on local down payment assistance programs.
  • Speak to a Real Estate Agent: Knowledgeable, experienced agents will be able to provide strong guidance and advocate for your best interests.
  • Consult a Financial Advisor: A financial advisor can help you ensure your home buying goals are aligned with your long-term financial goals.

For these conversations, try to bring as much information as possible, as well as any questions or worries you have. The more you engage, the better the advice will be!

Summary and Final Tips

When it comes to buying a home, knowledge is key! By sorting out the financials—like down payment, monthly costs, and interest rates—you’re setting yourself up for success. For first-time buyers, diving into real estate might seem overwhelming. With some prep, research, and support, you’ll be able to break it down into more manageable pieces. 

So take a breath, prepare your tools and tips, and figure out how owning a home could be closer than you think.

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The information contained in this blog is for general information purposes only, and while believed to be accurate, Trelora assumes no legal responsibility for accuracy. Information provided within should not relied upon as legal advice. Please consult with your local advisors for independent information regarding availability and applicability in your market.