When looking to buy a home in California, you’ll need to figure out how much you can afford. Home affordability calculators
can be helpful tools for understanding your potential monthly mortgage payment, but they don’t account for the other human factors like family planning and retirement. To determine what you really should spend on your monthly mortgage, versus what you can technically afford, there are some standard factors to consider.
1. Calculate your total debt.
Your debt-to-income ratio is a calculation used by lenders to determine how much of your monthly income is already owed to someone. This figure can include student loans, child support or alimony, auto loans, and the minimum owed on your credit cards. A good rule of thumb is to pay down these other debts before taking on more debt.
2. Try to spend less than 30% of your gross income on your home.
A standard rule that lenders use as a criterion is to not allow people to spend more than 30% of their gross income on their mortgage. You may have heard the term “house poor.” This term is used when more than 28% of your income is allocated toward your housing, which includes principal, interest, taxes and insurance (also known as the housing ratio or front-end ratio). So while you may have a gorgeous home, you likely won’t be able to buy furniture or entertain guests because you’re living paycheck to paycheck once you pay your mortgage and other bills.
3. Don’t forget about your home’s down payment cost.
Another factor to consider when buying a new home is the cost of your down payment. For those taking advantage of an FHA or VA mortgage, you may only need to put down between 3% and 5% of your home’s purchase price. However, that will add an additional cost of private mortgage insurance (PMI). Most other mortgages require a 20% down payment of the home’s purchase price. It’s a good idea to start saving up for your down payment long before you begin house shopping.
4. Know what you’re getting into with upkeep.
When looking at houses, you may get excited by the thought of having your own pool or the big backyard of your dreams. Just remember that these types of items can cost a lot in maintenance over the years. Depending on your climate and landscape, you’ll need to manage your yard’s upkeep, which may include leaf removal, tree trimming or removal, gardening and landscaping, growing and mowing the lawn. A pool can put you in the deep end quickly with the cost of chemicals and ongoing supplies and maintenance, not to mention the extra liability that requires insurance.
5. Failing to plan means planning to fail.
Another way to look at how much home you can afford is to figure out your long-term lifestyle and plan accordingly. Do you hope to have a family and children someday? Do you love to travel or go out on the weekends? How much do you want in retirement savings? Factor in those additional costs and see if you can still swing it. These factors don’t usually make it into a financial calculator, so be prepared to consider these elements before creating your monthly housing budget.
6. Expect the unexpected.
One of the homeowner tips you’ve probably heard is to make sure you save enough money in an emergency fund for unexpected repairs and to leave enough in your monthly budget to continuously save for a rainy day. Hopefully, some of the larger ticket items will be revealed during your home inspection, but with homeownership, it’s always smart to expect the unexpected. At some point, your furnace may break or your roof could need replacing, and you will be expected to have the money to pay for it.
Ready to figure out how much home you can afford? Use our home affordability calculator
or contact a mortgage officer