How Much Can I Spend on a House?

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Before you can begin your home buying process, you need to better understand how much you can afford. You DON’T want to stretch yourself too thin, and set a huge strain on your finances – that would lead you to lose out on many of the benefits of owning your home (such as financial/tax benefits and psychological benefits).

Down Payment

The first of the costs that you will have to keep in mind while considering your budget, is the down payment for the property. Unless you are buying property all-cash, you would need to set down a down payment for your lender to finance the rest.

Down payments requirements can range from a couple of % to 15-20%, depending on what type of mortgage you are looking for. A conventional home loan mortgage, as you would find with a traditional lender, would offer you a financing of usually up to 80-90%, in which case you would be required to fill the remaining 10-20%.

For options where you want to reduce the required down payment %, you can look for VA loans (if you have legal veteran status in the US), or FHA loans (usually more favorable to those with lower credit scores). As you would expect, you would need to qualify for these special types of loans, and you must find a lender that is willing to work with such loans. In cases, you can see your required down payment drop to 2-4%.

Do keep in mind that the less you pay as part of the down payment, the larger the amount you’ll be borrowing, the more you’ll be paying in interest, and therefore the more expensive your home will end up being. This will be important to keep in mind as you weigh the pros and cons of renting vs buying.

Closing Costs

As you buy a home, you’ll be faced with a plethora of closing costs, depending on your geography and transaction details. Closing costs can include agents’ commissions, HOA fees, mortgage insurance, title search fees, lender’s and owner’s title policy, earthquake insurance, and in the case of NYC, if your property costs >$1M, NYC Mansion Tax. As an estimate, you can expect to pay anywhere between 1-5% on closing costs (such a drastic range because some of these are flat fees, and some are %, so depending on the price of your home, the total % of closing costs will vary).

Mortgage Payments

Assuming you financed your home purchase with a mortgage, you’re now going to have to make mortgage payments every month to the lender. Your rates and the final financed amount will determine how much you have to pay. Here’s an easy-to-use mortgage calculator to determine your payments, and how long you can expect to pay them (provided by LendEdu).

Ownership Costs

While it would be nice to brush off all financial responsibility after a huge home purchase, other than mortgage payments, there are other forms of costs that you need to be mindful of. These can range from property taxes (the national average stands at around 1.68%), to maintenance costs that are estimated to about either 1% of the price of your home, or $1/sqft (depending on how crazy the market is).

All these costs add up quickly, not that they started small to begin with. Homeownership can become a huge financial and psychological burden if not prepared for, but can be one of the most rewarding aspects of life if approached carefully. Prepare now, speak to your agent and financial advisor, or at the least, do your research online, specific to your geography, so that you may fall in the latter category and have a pleasant homeownership experience!