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Buying a home with little- or no-money down - Growella

What Price House Can I Afford?

By Dan Green

How much house can you afford? Here’s how to figure it out. First, determine upon your monthly budget for housing. Next, add the costs of running a household. Then, budget for savings and retirement. Work the math backwards to find your answer.

Why Online Mortgage Calculators Don’t Work

You and every other home buyer are wondering the same thing: “How much house can I afford?”

But it’s hard to know what information to trust when millions of mortgage-related websites all promise that their online mortgage tool can calculate a magic number for you.

Even the most accurate mortgage cost calculator will fail to produce a realistic figure. After all, these things are just software programs based on lender rules.

Problem is, every lender uses a different set of rules.

When you want to know how much house you can afford, and when you want to get a mortgage on a house, skip the calculator tools and start thinking about your lifestyle and goals for your future.

This article can get you started.

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Find Your Purchase Price Using “The Maximum Price Formula”

The Maximum Price formula is the most common way people determine how much home they can afford. If this is your first time buying a house, it’s the method you’re probably using, too.

The Maximum Price formula is based on mortgage guidelines . Mortgage guidelines are the checkboxes that must be checked in order for a mortgage loan to get approved.

In many mortgage guidelines, there’s a rule that says monthly housing costs cannot exceed 28% percent of a home buyer’s monthly income; and, monthly debts, including student loans and credit cards, cannot exceed 36 percent.

Mortgage calculators everywhere use the 28/36 ratio to help you determine how much home you can afford; and, it’s cited all over the internet.

Except the “rule” isn’t really a rule.

The 28/36 Formula for buying a home is one of the most flexible guidelines mortgage lenders use. You can spend more than 28% of your income on your house and still get approved.

And even doing the math can be somewhat of a fudge.

What counts as income, what counts as debt, and what loans you can exclude from the math aren’t things you’re going to necessarily know as a home buyer — especially because mortgage guidelines change all the time.

And, maybe you live in an expensive city. That makes the Maximum Price formula less effective, too. There are a lot of cities where housing is going to require a larger share of your income.

The truth is, it’s impossible for a mortgage calculator to tell you how much house you can afford. Only you can make that decision. Buying a home is a personal and emotional experience. It can’t be reduced to a formula.

There’s a better way to move forward.

Smart Home Buyers Shop For Homes By Payment

To answer “How much house can I afford?”, look past the mortgage calculators. Buying a home is personal. It can’t be automated.

Reframe your original question.

Your new question: “Monthly, how much can I pay for housing?”

It’s a better way to look at your money. What you’re paying every month and what fits inside your budget is the true meaning of home affordability.

Consider the home buyer who wants to make an offer on two similar homes on two similar streets.

Home 1 Home 2
Home Listing Price $300,000 $300,000
Close to a fire station? Yes No
Close to a police station? Yes No
Tax-advantaged area? Yes No

The homes have an identical price point, but Home 1 is way more affordable as compared to Home 2.

This is because homes close to fire stations and police stations pay lower rates for homeowners insurance , auto insurance , and home security systems .

And, because of the tax advantages given to the homeowner, the owner of Home 1 gets a real estate tax reduction, too.

This is why it’s good to shop for a house by payment instead of price. When you shop for a house by payment, you make better, more sensible decisions.

It’s easier to stay within a budget.

What Are Today’s Mortgage Rates?

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We Recommend: Make A Quick Budget Based On Your #Goals

The best way to answer “How much home can I afford?” is to know your monthly budget for housing, and then to optimize your choice in mortgages.

It’s simpler than it sounds. You only need to answer three basic questions.

And, if you don’t have the answers or know them, a qualified real estate agent can help. This is part of the service real estate agents provide, and one of the reasons why you should never buy a house without the help of someone qualified.

What are mortgage rates doing today?

All day, every day, mortgage rates change.

Yesterday’s mortgage rates are different from today’s mortgage rates, which are different from tomorrow’s.

Changing mortgage rates matter when you’re shopping for a home. When you own a home, mortgage rates become a key part of your monthly payment for your house.

Mortgage rates affect how much home you can afford.

If today’s mortgage rates are down, the amount of home you can afford will rise. If today’s mortgage rates are up, the amount of home you can afford will fall.

The affect of mortgage rates can be substantial on your payment. A once percentage point increase in mortgage rates (+1.00%) lowers your maximum home purchase price 11 percent!

This is why home buyers should keep an eye on current mortgage rates; and work with a real estate agent who will do the same.

Watching mortgage rates helps you make a better budgeting decision.

How long will I be in this house?

Ask yourself, “Will I be in this home more than 5 years?” If not, consider an adjustable-rate mortgage (ARM).

ARMs are home loans which start at a very low rate. Then, after some number of years have passed — usually five — the interest rate on the loan is allowed to change.

Sometimes, interest rates move higher when they adjust. Other times, they move lower. If you’re moving, though, it won’t matter. You’re never exposed to the risk of getting a new rate. This can help you save money.

ARMs are excellent for home buyers who know they’ll move before their teaser rate expires.

Adjustable-rate mortgage rates can be as much as 100 basis points (1.00%) below fixed-rate mortgage rates.

Home buyers who use ARMs benefit from lower monthly payments, which stretches the listing price for homes they can be approved to go purchase.

What’s the best mortgage loan for your goals?

A mortgage is a loan that is used to buy real estate. There are multiple mortgage types.

The mortgage type you select for your home will affect how much home you can afford.

For example, if you are a military veteran or active duty serviceperson, you have access to a special mortgage program called the VA loan . VA loans offer below-market mortgage rates and reduced loan fees.

The USDA mortgage loan is a 100% mortgage program that might be a good fit. And, same for cons FHA mortgage loan, which requires a 3.5% down payment.

Getting a low mortgage rate stretches your maximum purchase price on a home.

Similarly, the less money you put toward down payment , the larger your mortgage loan will be. Larger loan sizes yield larger monthly payments, so be aware of how your borrowing choices affect your payment.

This is where Down Payment Assistance programs come in handy.

Down Payment Assistance programs can be used for down payment money, for closing cost reimbursement, and for tax reductions. These each can affect your payment and home affordability.

When you’re buying a home, consider all of your mortgage choices and make sure to check free down payment assistance programs in your area.

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Written by Dan Green

Dan Green is a personal finance expert and the founder of Growella. His expertise has been cited by The Wall Street, NPR, and CNBC; and, his advice has helped millions of people make better choices with their money. Dan hosts the mortgage news show "The Mortgage Minute-and-a-Half" three times weekly on YouTube.

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