Figuring Out How Much House You Can (Really) Afford

With our baby’s arrival and my returning to work, we’re focusing our attention on two of our goals for this year – paying off the student loan and buying a house.

As we begin the process one of our first steps is seeing how much of a mortgage we can comfortably afford and figuring a down payment goal.

If you’re also in the market for buying a home, I hope our notes can help you two be better prepared.

True Housing Costs

When figuring out how much we can afford on a house, we tried to keep in mind that there are certain expenses to owning a home.

Lenders typically focus on the actual mortgage payments, but it’s up to you to look at related housing costs like utilities, house maintenance (yard care, small projects), and a house emergency fund (replace roof, HVAC).

We discovered this when we bought our town home. We have a homeowner’s association fee that has gone up every year since we moved in.

Since we are looking at older homes for our next place, we have to factor in some buffer money for possible repairs. Thankfully we have friends who live around where we hope to buy, so we have some idea of what we can expect. (Though you certainly can’t plan for everything!)

Calculating Monthly Expenses and Budget

Now take another step back – what other obligations and goals do you two have? Owning a house is one of our personal goals, but it’s not the only one.

Our monthly budget has to have enough room in it so:

• I can work from home while taking care of the kids
• We can contribute and invest for our retirement
• We can have the flexibility to travel as a family

You may have similar goals or you may not – the point is many lenders when calculating how much house you can afford don’t take these factors into account. They may simply look at your income and your debt as the biggest factors. That’s why it truly pays for the two of you to go ahead and run the numbers for yourselves.

For us we take a fairly conservative position with the mortgage. When looking at houses, we’re basing our maximum limit on just my husband’s net income.

Examining the Down Payment

We want to make a much bigger down payment this time around with the goal of having a mortgage that is less than what we are currently paying.

The advantage of a bigger home down payment is that it will reduce your monthly mortgage payment. If you put 20% or more, you can avoid paying the additional expense of private mortgage insurance. You may also get a better deal with the lender on your interest rate.

Thoughts on Home Ownership

Enough from me, I’d love to hear from you. For those who already are home owners, what costs have you had to deal with that you didn’t expect? Besides mortgage payments, what have been your housing costs?