Here are the steps to determine how much home you can afford.
It’s actually very easy as long as you have a great Real Estate agent and lender to guide you through the process.
I’ve been advising my clients to use this method for the last 18 yrs.
What I’m about to say sounds basic, but you would be surprised how many buyers and sellers only do this once they get an offer accepted (not before they begin their home search), and then quickly realize they are in over their heads – thus cancelling escrow and potentially costing them money. I’ve seen sellers put their homes up for sale thinking they want to purchase a bigger home only to find out they can’t actually buy a home because they may have too much debt, bad credit, or not enough money to put down.
So, if you are thinking about purchasing a home (downsizing/upgrading), the very first thing you need to do is:
Put a monthly total housing budget together based on your income and what you can afford each month. This should include the following items:
- Mortgage payment
- HOA fees
- Mello Roos
- Property taxes
- Homeowner’s insurance
- Maint./repairs
This total housing expense is vastly different for each buyer and seller (looking to trade up or reduce costs).
Take the total housing expenses and let’s say you can afford $2800 per month for a house, which includes everything I listed above, and you have $50,000 for a down payment. Based on the $50,000 down payment, $2800 a month max payment, the current interest rates and your credit scores, the lender should be able to give you an extremely accurate purchase price. In this case, the max purchase price is about $550,000.
This does several things.
- Your purchase price will determine the neighborhoods/areas you will look in.
- It will make sure you are looking at the right homes – homes you can actually afford.
- It will greatly reduce the stress from buying a home because you know it fits into your budget perfectly.
- Puts you one step ahead of the competition – half the buyers/sellers have not done this and good listing agents (sellers’ agents) will uncover this through the offer process and conversations with the buyer’s agent. The seller’s agent will select an offer from a buyer who has completed the above steps because they know the buyer is qualified to buy and there is less chance for the home to fall out of escrow.
So use this method every time before you think about buying or selling.