One of the first steps in the homebuying process is fully understanding your finances. It’s important and necessary to help you determine how much you can afford.
Start by asking yourself the following questions and gather all your supporting documentation:
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 current interest rates, your debt, and credit history).
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 each month?
You will need to account for your current living expenses, all planned future expenses and add the costs of home improvements, maintenance and repairs. In 2013, owners spent an average of $2,500 for home improvements.
What is your financial cushion?
You’ve got the money for the down payment and closing costs, but you’ll also need financial reserves for life’s unexpected emergencies such as an illness, temporary job loss, or necessary home repairs such as a broken hot water heater. You should also consider any future major expenses such as a wedding or college tuition.
In such a competitive market, make sure your financial story is clear so you can guarantee the home you want, becomes yours. We’re happy to have a conversation about your current financial picture any time!