(Newswire.net — March 16, 2021) — When you’re looking to buy a home, the first question you should ask is how much can you afford. Don’t make the mistake of starting the house hunt before knowing your price range. You don’t want to get attached to a home that will stretch you too thin.
Mike “Mortgage Mike” Roberts, co-founder and president of City Creek Mortgage, has been in the mortgage industry for decades. Determining buyers’ affordable price ranges has become second nature to him. Mortgages can be complex, and not everyone knows how many pieces of the puzzle there are.
Roberts has some tips for people trying to determine their affordable price range.
According to Roberts, “Whether or not you work with us here at City Creek Mortgage or elsewhere, it’s important to have these discussions early in your home buying process, so you’ll be better prepared when the time comes to close on your next home.” He advises everyone to ask themselves these six questions:
1. How Much Do You Have Saved?
While figuring out your affordable range, the first place to look is at your savings account. You’ll need cash for a down payment. Often people aim for a down payment of five percent, although you can always put more down. In many circumstances, you don’t have to have a full five percent down payment, but you’ll want to speak with your lender to discuss how that will affect the loan.
Remember to not use all your savings on a down payment. If you have savings set aside, you’ll rest easy knowing you can make your monthly payments, even when emergencies arise. Keep this in mind while checking out your savings account and deciding how much of a down payment you can manage.
2. Is Your Income Reliable?
After looking at your savings, the next step is to look at your incoming monthly cash flow. While the down payment comes from your savings, the affordable range of your monthly payment depends on your monthly income. Is that income reliable?
While it’s tough to predict future job changes, look at whether or not your income is coming from multiple sources. If you have multiple sources, an unexpected job loss won’t affect your ability to keep up with the mortgage quite as much. If that’s the case might be able to afford more risk with a loan.
If you don’t feel that your income is reliable, look at how much you can afford to take out of your monthly income to set aside for emergencies. If you’re able to set some money aside, you won’t have to worry about unexpected income changes.
3. What Are Your Spending Habits Like?
A general rule is that housing expenses should only take up about a third of your income. However, this “one-third” rule should be seen as more of a guideline. It’s essential to look at the other things you spend money on each month.
How much of your income is used up by other expenses? If you have multiple dependents, regular medical expenses, or other regularly occurring and necessary costs, you might want to spend less than a third of your income on housing.
In rare cases, there are people with very low monthly expenses. These people might be able to spend a larger portion of their income on housing. Be cautious about this, though. Some people think they can afford to spend more on housing, but it becomes more difficult as time goes on.
Roberts commented on this, stating, “Many homeowners have unmanageable mortgage payments. They may have been able to afford the down payment, but the monthly payments are harder to meet than they anticipated. The inevitable result of an over-extended budget is an eventual inability to keep up with obligations.”
4. Do You Have Any Outstanding Debts?
Many people forget to account for debt when calculating expenses. Don’t let this happen to you.
Whether or not you’re already paying off your debt or if it’s not due until later, you should be factoring it into your decision about what type of home loan you can afford. Home loans are long-term investments. You don’t want your debt to start affecting your ability to make your mortgage payments years down the road.
5. What Stage Are You at In Life?
The type of loan you can afford is impacted by your stage in life. If you’re 15 years from retirement, you don’t want a mortgage that will be difficult to pay off quickly. Alternatively, if you’re at the beginning of your career, you can afford to spend decades paying off your loan.
Stated Roberts, “Some people don’t realize that borrowing habits should be different at the beginning of their career versus at the end. The closer you are to retirement, the more important it is to be able to pay off your loan quickly.”
6. Are You Comfortable With Risk?
Explained Roberts, “Here at City Creek Mortgage, we understand that emotions play a large role in how much home to buy. Making wise decisions is crucial to long-term mental and financial health.”
Some people are used to taking large risks, but if that’s not you, don’t let that cute home in the expensive neighborhood tempt you. Are you able to rest easy while investing aggressively? If so, you might not be bothered by owning a property that involves some risk.
On the other hand, if you experience a lot of stress when involved in a risky situation, you should stick with a lower-risk loan. If unforeseen expenses or a change in a job situation arises, a smaller loan will be easier to manage. There are pros and cons to being both aggressive and conservative with risk. The right thing to do depends on your personal level of comfort.