Everyone answers a simple question at the onset of each Home Buyer Seminar: “How much are you prepared to spend on your monthly mortgage compared to your rent?” The question is simple enough, and answers typically range from $150 less, to about the same, all the way up to whatever it takes. While the whatever it takes responses scare me a bit, most say they are prepared to spend about $200 more on their future mortgage than they are currently paying for rent. $200 seems reasonable enough, right? Let’s take a look.
While ultimately you need a lender’s approval to obtain a mortgage, knowing what you can afford to spend monthly and how that payment fits into your spending plan (or budget) is the best place to start. If you are currently spending $1,000 on rent and you feel you can afford to pay $1,200 on you future mortgage, where is the $200 increase in payment coming from? If you plan on “buckling down” when you move into your new home, why not start now?
Start making those practice payments by saving the difference between your projected mortgage payment and your current rent. If this comes easily, then you know your future payment is truly affordable. If it’s a struggle, consider scaling back your payment limit to something more comfortable. You also have to take into account possible increased utility costs, increased transportation costs if you are increasing your daily commute, and home maintenance and repairs. The last thing you want is to bite off more than you can chew and commit to too large of a monthly payment. The key is to be honest with yourself and the payment you are comfortable with. You don’t want to be “house poor!”
Making practice payments also help you save towards your down payment and closing costs. Not to mention, the habits you’re developing in the meantime will serve you well as a home owner. How are you going to pay for that untimely roof leak? You guessed it, through a rainy day saving account.
Remember to ask the right question, and that you set your own limit. Buying the nicest house on the block has its benefits, but can you truly afford it? Don’t ask your lender “how much will you lend me to buy a home?” First find the answer to “how much can I truly afford?” then go for that preapproval. Having trouble finding where to start? Attend a First Time Home Buyer Seminar, and we will help you get theere!
Ryan Tufts is a HomeOwnership Counselor at HOMEteam. Whether his clients are three months or three years from purchasing their home, Ryan assists clients in developing customized plans leading to home ownership. Ryan also conducts HOMEteam’s Home Buyer Seminars and Financial Capabilities Workshops, guiding clients towards mortgage affordability. He also conducts the Financial Capabilities Seminars and consults Individual Development Account (IDA) clients.