Preparing to buy a house can be exciting. But before your eyes get too big for your wallet, make sure you assess how much house you can really afford. Here are seven tips to calculate your home buying budget.

Before you fall in love with a house you can’t afford, make sure you take a step back and determine your home buying budget. It’s a common question to ask yourself: How much house can I really afford? And the answer will vary based on several factors. 
How much money you make, the amount of debt you carry, whether you have steady employment, current interest rates, and property tax rates in your area are just some of the things that affect the house you’ll be able to buy. To get an idea of what you can afford before you head to your lender for a preapproval letter, here are seven ways to estimate your home buying budget.

1. Look at your current monthly budget.

One of the quickest ways to get an idea of your home buying budget is to take a look at your current finances. How much are you paying for rent right now? Is it a comfortable amount? Can you pay more? Are you living paycheck-to-paycheck? 
Your current rent is a good way to gauge the size of the mortgage payment you feel comfortable taking on. It’s often easier to qualify for a mortgage with payments that are lower than your current rent because you’ve already proven you can handle that monthly cost. However, if your current rent payments are a struggle, you’ll need to find a mortgage with lower monthly payments.

2. Calculate your debt-to-income ratio.

One of the most important factors in qualifying for a loan is your debt-to-income ratio. This ratio shows what percentage of your income is already being spent each month on paying off debts, including student loans, credit card debt, and home loans. If you have a lot of debt, your ratio will be high and that will reduce how much house you can afford. Most lenders want your total ratio under 36 percent, and the ratio of just your mortgage under 28 percent, but there are some exceptions.

3. Use several online mortgage calculators.

The online mortgage calculators that tell you your home buying budget aren’t always completely accurate, but they can give you an idea. Some of them take into account things like closing costs, taxes, and insurance, while others don’t. The more detailed the calculator is, the more accurate it will be, so make sure you use several calculators to get a better picture of what you should expect to pay.
Still, calculators don’t take your unique situation into account. If you’re self-employed, for example, there may be some discrepancies in how your income is calculated for the purposes of getting a mortgage, and that can make a lot of calculators a bit of a guessing game. Make sure you shop around with different lenders and explain your unique situation to them.

4. Determine the cost of taxes and insurance.

7 tips to calculate your home buying budget
The taxes and insurance you have to pay on your new home will make your mortgage payment higher. You want to take those into account because they can vary depending on where you’re buying a house. Some parts of the country have very affordable property taxes, while other areas have very high taxes that can raise your monthly payment significantly. If the house has a solar power system, it’s also possible that it qualifies for tax abatements that can lower your costs. 
The same is true with homeowner’s insurance rates. If you are buying in an area that’s prone to wildfires or flooding, your insurance rates will be higher. By keeping these variables in mind, you can appropriately scale back the price of the home you can afford so you have room to add taxes and insurance onto the payments.

5. Do all the math.

Until you actually calculate how much it will cost you each month taking into account all costs relevant to your home, you won’t know for sure if the home is within your budget. Calculating mortgage payment schedules on your own can be difficult, so start by using a reliable mortgage calculator to get an idea of your monthly payment. Then add in the following based on the area you’re looking to buy:

  • Property tax rates
  • Insurance rates
  • HOA fees (if applicable)
  • Average utility costs (this should factor in the size of the home, whether you plan to get one with solar power or add solar power later, and the number of people in your household)
  • Monthly cable and internet costs

You don’t want to spend your time dreaming about a home that you think is financially within reach only to discover that the energy bills are astronomical and tip your home buying budget over the edge. It’s much better to set your sights on something that you can buy and enjoy for a long time to come.

6. Calculate your down payment, and keep saving for it.

A critical part of the home buying journey involves saving up for a down payment, and the bigger the down payment, the more you can afford to buy. On the other hand, you can purchase a home that’s not at the top of your budget, pay more for the down payment, and get a smaller mortgage. Both options work, and only you can decide which one works best for you. 
Regardless, you’ll be required to pay 20 percent of the final home price as a down payment in order to qualify for a conventional loan. If you don’t, you’ll typically be required to pay private mortgage insurance (PMI), which will add an extra cost to your mortgage every month.

7. Expand your search radius.

Location is everything when it comes to real estate. You probably already have your heart set on a very desirable neighborhood, but the homes in that area might mean sacrificing the home you love for a neighborhood you love. This is an important thing to consider when calculating how much house you can afford. How much neighborhood can you afford also? 
Consider expanding your search radius so you can get a house that fits your home buying budget and gives you everything you want. In a location with lower home prices and property taxes, your dollars will go a lot further and you’ll be able to do much more with the income you have.

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