Buying a house is one of life’s biggest milestones. When you dreamt of growing up and becoming an adult, did you picture landing your first job, getting married, and buying your first home? If so, then you know how easy it all seemed back then. Now that you’re all grown up, the homebuying process is a little less fun and a lot more complicated than you pictured, right? There are just so many things to consider!
Can I afford a house payment?
What are all of the costs involved with buying a home?
Are there any upfront costs that I should consider?
Should I rent or buy a house?
What kind of loan can I get?
This list goes on and on……
The first thing you need to figure out is whether you can afford this next stage of your life. Getting your first home is such an exciting milestone that it may be tempting to really hope you can afford it and end up stretching your finances too thin. You’ll want to do some thinking, crunch some numbers, and even talk to some professionals before you move further in the homebuying process. We’re here to help you do just that, by giving you a few things to consider and helping you answer that million-dollar question: Can I afford a house?
Essential factors to consider
Budget
The first step in deciding whether you can afford to buy a house involves your budget, so if you don’t have one, now’s the time to create one. If you already have a spreadsheet that outlines your monthly expenses and income, it’s time to break it out and take a good look at it. You essentially want to analyze the amount of money you have saved up, the amount you spend each month, and the amount you receive each month. Also keep in mind any existing debt you’re paying off, like from credit cards, school, or a car payment. Using this information, you’ll start to get an idea of how much you can afford spend on an initial down payment for a house and how much you can afford to pay monthly. A general rule of thumb:
- Put down at least 20% of the cost of the home as a down payment
- Pay no more than 28% of your monthly income on recurring home expenses
You can also plug your information into our One Minute Home Buy Ability Test and get a score that tells you what mortgage and down payment amount you may qualify for.
Debt-to-income (DTI) ratio
While you’re at it, determine your debt-to-income ratio (the percentage of your before-tax income that goes toward your debt payments each month). Add up all of the debt payments you owe each month and divide that number by your gross monthly income. For example, say you have a $1,500 rent payment, a $300 auto payment, a $200 student loan payment, a $300 credit card payment each month. These amounts add up to $2,300. Say your gross monthly income is $5,500. Divide your total payment by your gross monthly income, turn it into a percentage, and you get 42%.
A general rule of thumb is that 36% or less is an excellent debt-to-income ratio and up to 42% is still considered good. Knowing your debt-to-income ratio is important because it determines how trustworthy you appear to lenders. Having a lower DTI means you are less risky to lenders, and they’ll be more likely to give you a home loan (and with a better interest rate than if your DTI was higher).
Loans
Speaking of home loans! There are many kinds of mortgage loans, so make sure to look into them and see what you’re qualified for. Here at Hickory Point Bank, we offer our customers several types of mortgage loans. It’s a good idea to find out what loan you’ll be able to get, because this will determine how much your mortgage payment will be. For more information on home loans, check out our previous blog that details what you need to know before you get your first mortgage loan.
Additional expenses
On top of the down payment and mortgage payments, remember that there will be additional expenses that come with owning a house. Think past the initial costs and know that there will be other things to pay for when you buy a home. For instance:
- Homeowners insurance
- Property mortgage insurance (PMI) – for if you put less than 20% down
- Homeowners association (HOA) fees
- Trash and recycling fees
- Monthly utilities (e.g., internet, water, gas, electricity)
- Property tax
It’s also smart to put away some money on a monthly basis to budget for expenses like getting things around the house fixed when they break. You may end up needing to pay for things unexpectedly like an air conditioner replacement or roof repair. So just consider the extra responsibilities that you take on when you’re no longer just renting.
Renting versus buying
As you’re analyzing your finances and deciding whether or not you can afford a house, you may start wondering should I rent or buy a house? This renting versus buying debate is a common one, as there are pros and cons to both. It all boils down to what experience you’re looking for and how much you can spend.
Renting a house can be good for shorter term periods, like if you’re figuring out if you like an area or if you move a lot. Just remember that when you rent, your money isn’t used the same way as it is when it’s being put toward paying off a house that will eventually be 100% yours.
It’s fair to say that buying a house comes with much more responsibility than renting and requires more money since you want to be able to put a sizeable down payment at the start. If you decide you can afford it, buying a home allows you to have a more permanent living situation and each monthly payment gets you one step closer to full ownership!
We know that just looking into buying a house can be overwhelming. Here at Hickory Point Bank, we’re here to help answer any questions you may have. If you need more information, stop by any of our Central Illinois locations and talk with a loan officer today! We’re happy to walk with you through the process every step of the way and help you make the decision that’s best for you.
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