How Much House Can I Afford?

To determine ‘how much house can I afford’, there is a standard rule that your monthly expenses should not exceed 36%. The 36% rule is based on dividing your monthly mortgage payments and other monthly debt payments by your gross monthly income. If you haven’t got a budget yet, it’s time to do that before you sit down with your mortgage broker to ensure you know what your budget looks like and what is reasonable for you.

Plan out a budget by factoring everything you can. Don’t lowball things because you want a nicer house, you’ll only loose your nicer house faster if you lie to yourself about how many stops you’ll make at Starbucks this month.

It’s easy math. Shoot for 30% and calculate. If you bring home $3000 per month, your mortgage (insurance and all) should be no more than $1000. If you bring home $6000 per month, it should be no more than $2000 per month. But even if your math makes 36% or better sense, you should be aware of your actual debt commitments. Is your car payment pretty high? How about that outstanding student debt? How much of your income goes to travel and savings? What will you have left over after making that kind of mortgage payment every month, and can you survive comfortably on that?

Key factors in calculating affordability are 1) your monthly income; 2) available funds to cover your down payment and closing costs; 3) your monthly expenses; 4) your credit profile.

  • Income – Money that you receive on a regular basis, such as your salary or income from investments. Your income helps establish a baseline for what you can afford to pay every month.
  • Funds available – This is the amount of cash you have available to put down and to cover closing costs. You can use your savings, investments or other sources.
  • Debt and expenses – It’s important to take into consideration other monthly obligations you may have, such as credit cards, car payments, student loans, groceries, utilities, insurance, etc.
  • Credit profile – Your credit score and the amount of debt you owe influence a lender’s view of you as a borrower. Those factors will help determine how much money you can borrow and what interest rate you’ll be charged.

We’ll provide you with an appropriate price range based on your situation. Most importantly, we’ll take into account all your monthly obligations to determine if a home is comfortably within reach.

It’s also important to plan for the future. Consider creating a savings plan for upcoming life events, such as having a child.


Purge Before You Move!

Moving isn’t fun 

Sure, buying a house is fun! And living in the new house is GREAT! But moving… none of us like moving. We love the results, right? But the move itself is laborious. You never realize how much junk you’ve accumulated until you start trying to fit it all into boxes and into a moving truck. Here are a few top places to PURGE before you move to help minimize the clutter.

1. Medicine Cabinet

You won’t believe how much stuff you have in this space that you never use. First, remove every pill box and bottle. Lay them out on your counter and dispose of expired meds. Check them all! You’ll be surprised how old that cough syrup actually is. Once you have cleared out your unwanted meds, place the items you wish to keep in a clearly labeled moving box.

Pro Tip: For really important medications, like life-saving epi-pens, inhalers or daily meds, I recommend a small plastic tote (about the size of a lunch box) to make sure you can find the stuff you will need first, or the things you need in the event of an emergency! When my husband and I moved, my birth control went missing for a week!! Eeek!!

2. Food

Like the medicine cabinet, the pantry is a place of no return! Declutter your pantry by emptying it shelf by shelf. Check expiration dates and staleness. If you are sure you won’t use something and it is still fresh, donate it to your local food pantry. Plenty of people can benefit from the things you no longer want or need.

Stop buying groceries about a week before you move (if you can!) and eat the canned foods and old frozen foods that have fallen to the back or the bottom of your fridge or pantry. It will save you money and it will also minimize how much you need to move from one fridge to the next on an already stressful moving day!

Pro Tip: If you’ve gotten to the bottom of your fridge and you don’t really want to eat the thing that’s left in the back of the freezer, toss it. If you don’t want it now, you won’t want it in the new house either!

3. Basement

Basements tend to be universal dumping grounds. If you have been living in your home for a long time, it may be necessary to go as far as getting a dumpster to unload no longer used items.

Be as honest with yourself as you can about what is essential to take with you. I can’t tell you the number of people who have stored every last Lego and art project from their now-grown children. Remember that saving your most special items is not the same as saving everything.

Pro Tip: My mom decluttered by giving the 4 of us (now grown) children boxes of things she felt would be significant to us – school papers, old project, etc. This was great because we were able to pick out things that did matter and toss the rest without a sense of guilt.

4. Garage

Like the basement, the garage typically holds tools and household items that are rarely, if ever, used. Moving is the time to ask yourself what value these items hold.

When decluttering the garage, use three large cardboard boxes: Label one “trash,” one “donate” and one “keep.” Use these boxes to help sort what is coming with you from what is garbage and being given away. Using a system to declutter will help you visualize how much you have, and it often helps people feel better about throwing things out and giving items away.

Pro Tip: I’m a big fan of the donate box because I often don’t want to throw something out because I recall the monetary value it had at one time. And, many donation locations like the Salvation Army will write you a receipt for your donation and you can write it off at tax time! You’ll be astonished how much you donate!

5. Closets

If you aren’t someone who declutters on an annual basis, this area of the home may seem daunting, but in truth it’s the easiest. You know what you wear and what you love.

I find also that decluttering both before and after a move is really important. I’m horrible about keeping up with my laundry so as the clean clothes diminish, I see more and more of the clothes I keep picking around. That skirt is so pretty but I never – ever – wear it. Its time for it to go. After the move, unpack a bit at a time. If you find a box of clothes you didn’t notice were gone, its time to seriously consider donating the whole box.

Pro Tip: Look on social media for a clothing swap near you! What a great way to ensure that your clothes are going to be loved by someone else and also liven up your wardrobe with a splash of something new and different that you’ll be in love with!


How much do I need to buy a house?

Aside from a down payment, what else do I expect?

Common Expenses in a Home Purchase

Of the following expenses, some will be optional and others will be part of the local custom for home buying in your area.  Ask lots of questions and be sure you’ve prepared a little extra cushion for things that may pop up!

  • Earnest Money/Good Faith Deposit. 1-10% of the purchase price. A deposit that counts toward your other costs.
  • Down payment. 0% to 20% of the purchase price
  • Home Inspection. $250-$500
  • Sewer Scope. $99-150
  • Various other inspections. $0- $500
  • Closing costs & Prepaid expenses – Closing costs are one time expenses.  Prepaid expenses are for future costs like homeowners insurance & property taxes. When you are shopping for a home, your realtor can help determine property tax. And be sure to shop around for homeowners’ insurance to get the best rate and coverage combination (and expect to pay these costs as a part of your closing fees).
  • Credit report. $0-60
  • Application fee. $0-$400
  • Appraisal. $400-$800
  • Origination fee. 0 to 1% of loan amount
  • Underwriting fee. $250-$700
  • Document preparation. $0-$300
  • Processing fee. $0-$400
  • Prepaid interest. Your loan interest covering the time from the close date to the end of the month – this will depend on when you close.
  • Lenders title insurance policy. $250-$700
  • Flood zone certification. $15-$90

Meet with your broker before looking at homes to estimate how much money you’ll need.

  • Escrow or closing fee. $200-$500
  • Attorney fees. $0-$600
  • Prepaid property taxes. Property taxes typically run from 1-3% of the homes value.  Your lender will require you to have 10-12 months worth of property taxes in your closing costs.
  • Homeowners insurance. $300-$500
  • Recording fees. $25-$120
  • Excise fee or transfer tax. 0 to 2% of sales price
  • Property survey. $0-$600

Many of these items are closing costs for your loan and you can negotiate to have the seller pay them for you, but be careful when you ask for that in your offer. If the home you want to buy is hot on the market, you need to consider carefully what things will set you above other potential buyers. Talk with your realtor and see if the buyer would be willing to cover closing cost or perhaps to split the cost.

The main focus is to be sure that you put back more money than just your down payment. Closing costs can be $5000 or more (and that’s on top of your down payment!) Some of this money you’ll need before you close, and other money you’ll need at the time that you close – but you don’t want to wait until the last minute to get your funds together if you are depending on gifts to come through because your broker will have to verify that you have the money before you’re able to close!

FREEZE! The Waiting Period

Congratulations! You’ve found your dream home, you’ve been approved for a mortgage and you are waiting to close. Now freeze!!

You’ve entered the financing equivalent of “The Twilight Zone,” that critical time warp where too many home buyers do something silly that changes their all-important debt-to-income ratios (DTI). If you do that, you might be pushed into accepting a higher interest rate on your loan than you planned. Or worse, you could lose the financing altogether.

It used to be that once you passed muster for a loan, it was clear sailing. But that was before the mortgage meltdown when lenders were looking the other way. Nowadays, borrowers are underwritten twice, once to gain approval and again a few days before the closing to make sure you haven’t piled on more debt than you can handle during the intervening “quiet” period.

The key is your DTI, or how much you owe on a recurring basis compared to what you earn every month. If it gets out of kilter, all bets are off.

Unfortunately, not every buyer is told not to give the lender a reason to renege. And many do. Not intentionally, of course. In fact, some of the things people do during the quiet period are normal, everyday occurrences. But they do them. Even when instructed not to.

According to a recent study of more than 100,000 loans, one in every eight borrowers obtains a new credit line during the weeks prior to closing. Traditional underwriting guidelines and ratios take into account everyday living with existing credit lines. But new ones rock the boat, and some borrowers fall overboard.

The biggest mistake, perhaps, is buying a car, which adds significantly to your debt load unless you are paying cash. Ditto for a boat. One guy we heard of decided to purchase a $100,000 Hummer two weeks before closing on a $1.5 million house. When the bank got wind of his new wheels, it drove off into the sunset because the buyer’s DTI was no longer in line. And the buyer, who already was on the edge, lost the deal — as well as his $50,000 earnest money deposit. (Actually, you can mess up your chances big time by buying a car even before you apply for a loan because it adds to your total debt service. So if you are in the market for a house, put off buying a car until after you close.)

A car isn’t the only thing that can sink your mortgage. Any kind of big ticket item can have the same effect. It’s not like you have to stop living, but any significant change out of the ordinary can cause your lender’s antenna to wiggle.

Sure you are going to need furniture in your new place. But unless you can pay cash, wait to order that dining room set until after you close. Even if there won’t be any payments due for six months, wait. The same goes for joining a gym. That recurring monthly charge also is considered debt by lenders.

Don’t change jobs during the critical weeks before closing, either. And don’t dig into your nest egg to pay cash for something big that you don’t absolutely need right away. Banks want to be certain you have enough cash on hand to make two and sometimes more monthly payments should something happen like a major illness or layoff. Even moving money around from one account to another could be deadly.

The rule of thumb here: When in doubt, ask your loan officer first.

Closing Costs

You find the perfect house, you make an offer and the buyer accepts! You both sign the contract! What next? Sometimes it feels like lots and lots of money!

If you aren’t prepared to close as fast as you do, you might find yourself in quite a predicament! This is why its best to put back at least 5% of the potential cost of your home before you start looking. Traditional downpayment vary but an FHA loan requires 3.5% down payment, and closing fees average around 2% of the purchase price—on a $200,000 home, that’s $4,000—but they can go as high as 5%.

The laundry list of costs is long. Before you even get to the closing table, you’ll pay the lender for a credit check and appraisal; you’ll also pay out of pocket for an inspection, property survey and any attorney’s fees. At the closing you may be hit with other lender fees, plus a title search and lender’s title insurance, charges to record your deed and property transfer taxes. In addition, the lender will collect roughly two months of advance payments on property taxes and insurance.

Sometimes a seller will agree to cover some or all of the closing costs—an offer that usually goes hand-in-hand with a higher purchase price. If they won’t cover all the closing cost, maybe your realtor can negotiate a split. This is common if your offer is solid.

Another option to help you with up front costs is to ask your broker about down payment assistance. Depending on the part of the country you live in and what the average income in your county is, you probably will qualify for a down payment assistance program so that the money you pay up front is just closing costs and not both a down payment and closing costs.

Most importantly, talk with your broker about what expenses you’ll face up front so you can be prepared to make the right purchasing decision.

Start with Pre-approval, Not Zillow

While shopping for a home may be pleasant, serious buyers need to start the process in a lender’s office, not on Zillow– and by obtaining a mortgage pre approval. This process, basically an evaluation that determines whether the borrower qualifies for a loan, is important for several reasons.

First and foremost, in today’s real estate market, most sellers and their agents expect buyers have one, and may only negotiate with people who have proof that they can obtain financing. Second, would-be homeowners learn the maximum amount they can borrow. This prevents you from wasting your time (and your realtor’s time) looking at houses you can’t afford. They can also have an opportunity to discuss financing options and budgeting with the lender. Finally, if there is any problem with their credit, they’ll get a heads-up about it up front instead of after finding the house of their dreams.

Pre-qualification Vs. Pre-approval

Although they sound alike, being pre-qualified for a loan is not the same thing as being pre-approved.

Pre-qualification is the initial step in the mortgage process, and it’s generally fairly simple. To pre-qualify for a mortgage, you meet with a lender (though the procedure can also be done over the phone or on the internet), and provide information about your assets and income. Based on that information, the lender will estimate roughly how much money you can borrow. The entire process is informal. It can be useful as an estimate of how much you can afford to spend on a residence, but because it’s a quick procedure – and based only on the information you provide to the lender – your pre-qualified amount is not a sure thing; it’s just the amount for which you might expect to be approved. For this reason, being a pre-qualified buyer doesn’t carry the same weight as being a pre-approved buyer who has been more thoroughly investigated.

With pre-approval, the lender checks your credit and verifies your financial and employment information and documentation; this not only confirms your ability to qualify for a mortgage but approves a specific loan amount (usually for a particular period, such as 90 days).


Get the Process Started

Get your approval process started by contacting Ginny Duffy at Pinnacle Capital Mortgage. She can get you the details you need to make an informed decision – like how much house can you afford (and how much house do you want to afford).

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