All successful journeys have a common ingredient: a well-planned budget that keeps you on course. Whether you're going on a long road trip or buying a home, you'll want to talk with your crew about the details of your final destination and how you'll pay for the journey, including all detours and excursions along the way. Budgeting is never as much fun as the trip itself, but it's a critical part of the ride.
If you're like millions of families on the path to homeownership this spring, you're likely wondering how much you can afford. You can start by answering the following questions:
What is your annual gross income? You can get a very rough estimate of your affordable home price range by multiplying your annual gross income by 2.5. For example, if your annual gross income is $50,000, you may be able to afford a home worth $125,000 (this varies depending on factors such as current interest rates, your debt, credit history, etc.). If you're looking to buy a condominium, mortgage rates may be slightly higher and you'll have to budget for the cost of your monthly condominium fee.
How much have you saved for a down payment and other costs? You'll have to make a down payment of at least 3% – and generally between 5 and 20% – of the purchase price to qualify for a mortgage. Also, when you get a mortgage, you'll need to pay closing costs that include an appraisal fee, credit report fee, tax services fee, government recording charges, and your lender's origination fee. Typically, these range from 2 to 5% of your purchase price.
How much do you spend? Remember to account for your current living expenses and all planned future expenses such as a new car or a family trip.
What is your financial cushion? In addition to the costs associated with purchasing your home, you'll need financial reserves for life's unexpected emergencies such as an illness, temporary job loss, or necessary home repairs. You should also factor in any future major expenses such as a wedding or college tuition.
Rest assured that your lender will help determine how much home you can responsibly afford by evaluating your four Cs, the measurements they use to determine how much they're willing to lend you. Your lender is a key co-pilot on your homebuying journey and will help you stay on course until you reach your final destination.