Many begin the homebuying process with one question: How much house can I afford? The answer is often more complicated than online calculators would have you believe. If you’re just starting the search for your first home, you’ll need to consider a number of factors: your current debt load, how much you have saved up, and whether you’ll soon be having a small bundle of joy in desperate need of diapers and a 529. When you’re deciding how much you can pay per month, keep the following guidelines in mind.
1. First step: Get pre-approved
Perhaps even before you find a real estate agent, you should get pre-approved for a mortgage loan. Realtors need a pre-approval before they can close the sale, and more importantly, speaking to a lender will give you an adequate sense of your price range.
“Very few people get pre-approved before coming to me,” says Chicago broker John Grafft of Prudential Rubloff. “But it’s important in setting realistic expectations. This way, you can find a house you love and within your budget. And remember not to sign up for any credit cards or make any large purchases between pre-approval and closing, as it will hinder your chances of closing on your new home.”
2. Research global, think local
There are myriad online resources to help you do preliminary research. The Department of Housing and Urban Development explains programs state-by-state and offers a comprehensive loan comparison worksheet. But local knowledge is essential as well. “Local lenders are more accessible, for one,” says Kevin Lisota, founder and CEO of Seattle-based Findwell. “Referrals, word of mouth – these are good ways to find someone experienced and trustworthy. Your real estate agent deals with good and bad lenders every day. Ask them for a recommendation.”
Manhattan Beach’s Ed Kaminsky, one of the Wall Street Journal’s top 100 real estate agents, puts it more bluntly. “The younger generation may think that they can learn everything they need to know online, but they’d miss out on guidance and local information. There’s a difference between knowledge and wisdom.
“Knowledge is knowing that a tomato is a fruit. Wisdom is knowing not to put it in a fruit salad.”
When it comes to hyper-local information – such as what percentage of the asking price you should bid – an experienced hand can be invaluable.
3. Go with how much house you should afford, not can afford
The cost of homeownership doesn’t end with your mortgage payment: taxes and insurance factor in as well. Make sure you’ll enough left over to enjoy yourself and save up for future expenses. It’s a tradeoff that more and more people make: “My clients don’t want to end up house-poor,” says Silicon Valley realtor C.J. Brasiel. “They’ll take less house in favor of more discretionary spending. That’s a decision I support for my clients.”
Chicago real estate broker Don Friedman recommends that homebuyers set aside enough for 13 payments a year, not 12. “That’ll get your principal paid down faster, saving you money overall.” Not to mention that budgeting in a little extra provides a cushion against emergencies.
Whether you’re vaguely thinking of buying rather than renting, or ready to make the first steps towards homeownership, an accurate understanding of how much house you can afford is vital in setting achievable goals.