Buying a new house can be a bit of a daunting process, even for experienced home buyers. If you’re considering buying a house, one of the most important questions you’ve probably been asking yourself is: “How much house can I afford?”
Below are the main factors that impact how much house you can afford. You can use this information to work up a general idea of the range you should be looking for when you start to browse listings. If you know you are about to enter the housing market, this information can also help you to “clean up” your financial situation before you approach a lender, to make sure you put yourself in the best financial position to get the house you want in the Spokane/North Idaho real estate market.
1. Your Total Income
Unless you have a significant amount of cash or other assets, you already know that your income is an important factor in determining what sort of house you can afford. Lenders will look at income carefully to calculate how much of it is already committed to other non-discretionary monthly expenses and apply a formula to your income figure to determine how much money you can be expected to allocate to new mortgage and other home costs, such as insurance, taxes, and HOA fees, while still being able to cover your other living expenses.
Some financial advisers will tell you that a good rule of thumb is that you should shop for a house so that your home debt will be no more than about 2.5 to 3 times your annual gross income. Thus, if your salary is $100,000, you should keep your mortgage debt to no more than $250,000 to $300,000. Of course, other factors can affect this calculation, such as the amount of money you have set aside for a down payment, the amount of other debt you hold, and so on. In addition, lenders may be more flexible in markets with high median house prices.
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Your Debt-to-Income Ratio
Another important number is your overall debt-to-income ratio. If your income is high but a good chunk of your take-home pay goes to pay outstanding debts such as auto loans or credit card payments, you’re less likely to get approved for a high loan amount.
Depending upon the situation, lenders will want to make sure that your monthly debt outflow – including your mortgage costs – does not exceed 36% of your gross monthly income. For example, if your monthly gross income is $7000 ($84,000 annual salary) and you have a car payment of $400 per month, your lender will calculate your loan based on $7000 x 36% = $2520, minus $400 auto payment = $2110 per month to cover all your housing costs.
3. How Much You Have For a Down Payment
Generally, the more you can put as a down payment on a house the better, in terms of getting favorable loan terms. A down payment of 20% or more will improve your chances of being approved for a larger loan. A higher down payment means that the lender owns less of the house, and is less exposed to loss if the market goes down. If you’re finding that homes in the Spokane area cost more than 2.5 to 3 times your annual salary, you can maximize your chances of getting approved for the loan amount you need by putting down a larger down payment.
But don’t let the fact that you have a smaller amount discourage you. Today, some lenders will extend a loan with as little as 3% down. Talk to a qualified real estate agent who can give you the “low-down” on what you can expect to see from a lender in your situation.
4. The Amount of Flexibility You Have in This Real Estate Market
How much house you can afford also depends a great deal on where you are looking to buy. Homes in the most sought-after neighborhoods in Spokane like North Indian Trail, Rockwood, or Manito-Cannon Hill will likely go for a premium price, so you get less house for the dollar. You are likely to find more opportunities if you are flexible about where you are willing to live.
5. Talk With an Experienced Agent
Before you start home shopping, take a good look at your financial situation: income, debt, and savings. Be realistic not only about what a lender will offer but about how much you feel you can comfortably pay each month. Then sit down with one of our Legacy Group agents.
We can help you figure out your best next steps, and you can be sure we will do all that we can to make your home-buying adventure happen. Our experienced real estate agents know the local housing market, and we also have a pulse on what is happening in the mortgage market. We can help you position yourself to get a solid loan and the most house for your money.
Contact Legacy Group today and take the first leap towards owning a new home.