Can You Afford to Buy a House?

While everyone would like to live the American Dream of owning a home, it is important to understand what costs are involved in buying and owning a home. 

Many potential buyers sometimes forget to factor in the down payment, homeowners insurance, and possible depreciation, as well as the costs associated with closing the transaction, moving, purchasing major appliances, and home, landscape, and pool maintenance, not to mention furnishings and design accessories once you have moved in.  

For a general idea of your buying power, multiply your annual gross income by 2½. For example, if you had a household income of $50,000, you might be able to qualify for a $125,000 home. The actual dollar figure may be more or less, depending on your individual situation, debts, and credit history.  

Housing Expense Ratio 

As a general guide, your monthly mortgage payment should be less than, or equal to, a percentage of your income, usually about a quarter of your gross monthly income. The percentage can change depending on the type of mortgage you choose. However, there are mortgage products available that focus solely on the debt-to-income ratio. Your lender can provide more information on these types of mortgage products.  

Debt-to-Income  

Your buying power can be affected by factors such as income, debt, and credit history. Your debt, including credit card bills, car loans, and other expenses - housing, alimony, and child support, for instance - should not be more than about 30 to 40% of your gross income.  

How Much Money Do You Need to Buy a Home?  

You'll need money for:  

1.  A down payment
2.  Closing costs
3.  Other housing-related costs – mortgage payments, maintenance, and repair costs.  

Your Down Payment  

The down payment is a percentage of the value of the property. That percentage will be determined by the type of mortgage you select. Down payments usually range from 3 to 20% of the property value.  

You may be required to have Private Mortgage Insurance (PMI or MI), if your down payment is less than 20%. 

Closing Costs  

Closing costs include points, taxes, title insurance, financing costs, items that must be prepaid or escrowed, and other settlement costs. These costs generally range between 2 and 7% of the property value, depending on the loan you obtain and the terms of your contract. You will receive an estimate of these costs from your lender after you apply for a mortgage. Depending on the type of loan, you may receive assistance with these costs.  

While it may seem that it can take a lot to finally buy your home, you may be closer than you think.