Ask a Real Estate Lawyer: How Much Home Can I Afford?
As real estate lawyers, we’ve seen a lot of property change hands. Here’s our take on 3 easy calculations you should make to determine how much home you can really afford to buy.
If you’re a first-time home buyer looking to talk to a real estate lawyer, one of the questions on your mind may be how to determine what homes are in your price range. It’s a difficult question to answer, and lots of things go into it. For example, homeowner taxes are higher in some towns than in others, so you may be able to afford a more expensive home in one municipality versus another. But while there’s no one easy answer, there are a few calculations you can do to get yourself on the right track. Here are three easy calculations to help you determine how much house you can afford.
Calculation 1: What are your household expenses?
The first thing to consider when purchasing a house is what your household expenses are. This includes both fixed expenses and variable expenses. When considering your household expenses, you’ll also need to consider expenses you may not pay now but would pay if you purchased a home. For example, if you’re currently renting an apartment and heat and hot water are included in your rental price, you’d have to take those into consideration when calculating your household expenses.
Common household expenses to consider include:
- Car Payments
- Groceries & Household Expenses
- Medical Bills
- Credit Card Payments
- Student Loan Payments
- Miscellaneous Expenses
Fixed Expenses + Estimated Variable Expenses = Household Expenses
It’s good to track your expenses for a few months to get a good idea of your monthly household expenses.
Calculation 2: What can you afford?
The next thing to consider is what you can afford. It’s easier to determine this once you’ve figured out your household expenses. At this point, you can determine your monthly income, subtract out your monthly expenses, and have a rough idea of what you can afford to pay per month for mortgage and taxes.
Net Income – Household Expenses = Monthly Home Budget
It’s a good idea to aim to pay a little lower than the maximum amount you can afford so that you can add to your savings account on a monthly basis.
Calculation 3: What are your upfront costs?
Calculation 3 is the one that trips a lot of people up. A lot of first-time home buyers especially don’t consider upfront costs like down payments and closing costs when calculating how much house they can afford. Even if you can afford, in theory, to pay the mortgage on a house on a monthly basis, it does you no good if you haven’t saved enough money to pay your upfront costs. It’s a good idea to talk to the bank you’re planning to get your loan from in order to determine what these upfront costs would look like for you. Usually, you have to have these costs available in your savings account before you can purchase a home.
Downpayment + Closing Costs = Upfront Costs
A lot goes into buying a home, and it can seem intimidating at first. But sitting down and crunching the numbers to determine what you can afford can help you have realistic expectations of the home buying process and prevent disappointment down the road.
Are you planning to buy a home and need a real estate lawyer? Contact SatLaw for a stress-free closing.
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