Buying A House In The Highland Lakes Area? Here’s How Much You Can Afford…
By Preston Rosamond
Are you wanting to buy a house in an area with picturesque views of lakes and wildlife? If you said yes, then Highland Lakes is a perfect choice, with a chain of six lakes dispersed across the area and where wildlife is easily spotted. Now you just need to determine how much you can afford—and want to afford.
If you have already started thinking about a price range, you need to keep in mind how much house you can buy is dictated by how much you can afford to pay per month, not the actual loan amount itself. (1) This is due to potentially having costs like homeowners association fees, private mortgage insurance, and property taxes which affect the monthly payment.
One of the most influential factors lenders use to decide how high of a monthly house payment you can afford is by using the percentage of your monthly debt payments to income ratio. The standard percentage range is 28-36% of your monthly income. (2) Use these two extreme percentages to calculate the range of monthly house payments they think you could pay. Once you know that range, you’ll know how much house you can afford.
1. Determine Household Income And Debts
Before you do anything else, you need to be aware of your current financial situation and what you have to work with.
Write out your pre-tax, household income and list out all your debts that would appear on a credit report. This includes student loans, credit card payments, car loans and leases, personal loans, etc. You do not need to include variable expenses like Wi-Fi, phone, utilities, or your current monthly housing payment. (3)
2. Calculate Debt-To-Income Ratio
Lenders determine how much to loan you by using your total debt-to-income ratio (DTI). However, they use whichever is the lowest of your front-end max ratio and back-end max ratio, the range between 28% and 36%, which we talked about earlier.
Don’t let the terminology scare you. Here’s an example:
You have a household annual income of $100,000 and monthly payments that total $800/month.
For your front-end max ratio, you take your household income of $100,000, divide by 12 and multiply by 0.28. This comes out to $2,333.33 as the low end of the range of payment the lender is estimating you can afford.
Now let’s go to the back-end ratio. Divide your household annual income of $100,000 by 12, then multiply by 0.36 to get $3,000.00. One last additional step is to subtract your total monthly debt payments of $800, which gives you $2,200.00 as your back-end max ratio.
3. Start Looking At Houses
Since lenders use the lowest of the two amounts, $2,200.00 is the maximum monthly payment you will most likely qualify for, depending on credit, type of loan, and personal situation. Having a lower percentage of your income tied up in monthly payments you are required to pay means you are more likely to pay back your mortgage and not default on the loan. (4)
Use a mortgage calculator to put in how much you can pay monthly, as well as your estimated down payment and type of loan you are thinking of getting. (5) Be aware of potential extra monthly costs like private mortgage insurance (PMI) if you don’t have 20% to put down, property taxes, and if there are any homeowners association fees that apply.
4. Does The Price Align With Your Financial Goals?
This is an important step to talk about and establish. A house is the largest purchase most people ever make. Ask yourself, “Does this mortgage and monthly payment give me enough room in my finances to afford all other expenses and what I want to do?”
You do not need to take out the maximum mortgage you qualify for and which you will eventually have to repay. If it is going to cause stress and pressure in other areas of your life, readjust your search using the amount you feel most comfortable paying each month when you factor in how much you spend on food, entertainment, utilities, etc.
Next Steps
Now you have a clearer picture of the monthly house payment you can afford and an estimate of how much of a mortgage you will qualify for. Since buying a house is a large financial decision, you want to be sure you make a good investment. Having an advisor you trust and who is able to verify your plans will set you up for success is highly recommended.
Our team at The Rosamond Financial Group would be honored to help you decide how much you should spend on a house and what makes sense for your financial goals and priorities. You can book a free introductory meeting online, call my office at 830-798-9400, or email smrosamond@rosamondfinancialgroup.com.
About Preston
Preston Rosamond is a financial advisor and the founder of The Rosamond Financial Group Wealth Management, LLC with nearly two decades of industry experience. He provides comprehensive wealth management and financial services to individuals, professionals, and families who enjoy simplicity and seek a professional to help them pursue their goals. Preston personally serves his clients with an individual touch and a sincere heart, and his servant’s attitude is evident from the moment you meet him. Learn more about Preston or start the conversation about your finances with him by emailing smrosamond@rosamondfinancialgroup.com or schedule a call with our online calendar.
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(1) https://blog.mint.com/housing/how-lenders-determine-how-much-house-you-can-afford-1013/
(2) https://www.mortgagecalculator.org/helpful-advice/mortgage-qualifications.php
(3) https://bettermoneyhabits.bankofamerica.com/en/home-ownership/mortgage-debt-to-income-ratio