Just because you were approved for a certain amount<\/a>, that doesn\u2019t mean you have to spend that much<\/a>. On paper, it may look like you can afford the estimated monthly mortgage<\/a>, but you don\u2019t want to overextend yourself. As a new homebuyer<\/a>, it\u2019s a really good idea to create a budget that you can comfortably manage without sacrificing too much.<\/p>\n If you\u2019re not sure where to start, we\u2019ve created a list of questions that\u2019ll help map out what your monthly expenses are, how much house you actually<\/i> need, and other useful considerations.<\/p>\n The first and foremost thing you need to consider when you ask yourself, \u201chow much house should I buy<\/a>?\u201d is your income. You\u2019ll need to tally up all of the money that comes into your home. This means your take-home wages, your spouse\u2019s take-home wages (if applicable), any alimony or child support payments, and any other income streams.<\/p>\n For simplicity\u2019s sake, let\u2019s say you bring home $2,000 per month, and your spouse brings home $2,500 per month. Total, your household earns $4,500.<\/p>\n Note: Lenders will look at your gross income when determining your eligibility.<\/i><\/p>\n After you\u2019ve figured out how much money is coming into<\/i> your house each month, you need to look at how much is going out<\/i> in the form of debt payments. That\u2019s because lenders look at your DTI, or debt-to-income ratio (i.e. how much you\u2019re obligated to pay in debts each month versus how much money you make), when determining how much they can safely loan you. Mortgage lenders like to see a DTI of 43% or lower.<\/p>\n DTI is calculated by adding up your monthly minimum debt payments and dividing that number by your gross monthly income. Debt payments include things like your minimum monthly payments for student loans, car payments, credit card payments, medical bills, and anything else that\u2019s considered debt.<\/p>\n So, let\u2019s say your gross monthly income is $4,000. Your debts are as follows:<\/p>\n Your total monthly debt is $830. That would put your DTI at around 21%. That means your mortgage payment can be no more than $890 per month, which would put you at 43% DTI.<\/p>\n Understand, though, that DTI says nothing of your monthly spending outside of debt payments. DTI doesn\u2019t include monthly expenses like cell phone bills, utilities, groceries, entertainment, or even basic needs like clothing. So that\u2019s something you should also consider while figuring out how much home you can afford.<\/p>\n The money you have saved shouldn\u2019t just cover your down payment<\/a> and closing costs<\/a>. Lenders typically want to know how much money you\u2019ll have left over after the sale is complete, or your cash reserves. Lenders want to know this because they want to have some reassurance that you won\u2019t default on your loan should your financial picture change.<\/p>\n Los Angeles top-selling agent<\/a> Allison Van Wig<\/a>, who works with 72% more single-family homes than the average agent in her area, advises clients to look at their rent payment and see how much they can save<\/a>.<\/p>\n \u201cYou want to look at what you’re paying in rent and if you’re saving anything. If your rent is $2,000 and you’re not saving anything, you\u2019re stretching yourself. You certainly don’t want to purchase a home where a mortgage payment is $2,800.\u201d<\/p><\/blockquote>\n You can start preparing yourself for the larger monthly payment by putting aside an extra few hundred dollars in the bank each month. Consult a financial advisor if you need some\u00a0 guidance.<\/p>\n Many financial experts recommend saving at least<\/i> three months\u2019 worth of housing payments in your savings account, but the more you have saved, the safer you\u2019ll be.<\/p>\n Contrary to popular belief, you do not<\/i> need 20%<\/a> for a down payment<\/a>. Yes, 20% will help to significantly lower your monthly payments, and you won\u2019t need to take out mortgage insurance<\/a>, but 20% of a house\u2019s price is a lot of money! The Federal Reserve Economic Research report for Q3 2020 shows the median home price was $324,900<\/a>. You would need $64,980 for a 20% down payment, and that\u2019s not including closing costs or any cash reserves left over.<\/p>\n Fortunately, the typical down payment<\/a> amount that first-time homebuyers bring to the table is about 7%<\/a>, according to the National Association of Realtors\u2019 2020 Profile of Home Buyers and Sellers. Depending on the loan you qualify for, you could put down as little as 0%! Buyers also have the option of using a national down payment assistance program<\/a> to help.<\/p>\n There are also closing cost assistance programs<\/a> that will help in that regard, too. Of course, you always have the option of asking the seller to help pay part or all of your closing costs<\/a> \u2014 but in a hot seller\u2019s market, they\u2019re not very likely to agree.<\/p>\n Your credit score<\/a> plays a big role in determining your ability to get a mortgage loan. On average, a first-time homebuyer\u2019s credit score ranges from between 683 to 739<\/a>. But that doesn\u2019t mean you\u2019re out of luck if your credit score is lower than that.<\/p>\n For example, those with a 580 score can apply for an FHA loan<\/a>, as long as you have at least 3.5% saved up for a down payment. Those with a 640 score can apply for a USDA loan<\/a>, and those with a 620 score can apply for a conventional loan<\/a> (though some lenders may require a higher score).<\/p>\n If your current credit score doesn\u2019t qualify you for a mortgage<\/a>, Van Wig recommends that buyers call an advisor sooner rather than later. That way, when you\u2019re ready to start shopping for a house, credit won\u2019t stand in your way.<\/p>\n \u201cIf you have bad credit, it can take up to a year and a half to fix it<\/a>. That doesn\u2019t mean you\u2019ll have to pay for a credit repair service, but it does mean that you may have to change how much you are paying toward your debts.\u201d<\/p>\n When lenders discuss mortgage rates<\/a>, they\u2019re referring to the interest that you\u2019ll pay on your home loan.<\/p>\n Suppose you\u2019re approved to buy a house for about $325,000, and you have $65,000 to put down. Your total loan amount will be $260,000, and you will pay interest on this amount. If your mortgage rate is 5%, then you\u2019ll actually pay $502,465 for your home over a 30-year fixed-rate mortgage.<\/p>\n Mortgage rates<\/a> are set based on a whole slew of economic factors, including the overnight exchange rates set by the Federal Reserve, but the rate you\u2019re offered by a lender will also depend on your financial profile and credit score. A change in rate can make a huge difference in your monthly mortgage payment, and what you\u2019ll pay for your home over time.<\/p>\n Once you have your finances figured out, this is where you need to be realistic. As much as you\u2019d love to find a forever home with ample space and amenities that you\u2019d never dream of selling, a home like that may be outside of your price range \u2014 for now.<\/p>\n Use these questions to figure out how much house you\u2019d realistically need right now. You\u2019ll want to jot your answers down on a piece of paper so you can refer back to them.<\/p>\n Ask yourself how long you intend on living in the house. Will you be staying there for a few years? A decade? Forever?<\/p>\n If you\u2019re going to live there for a long time, maybe you\u2019ll want a house you could grow into. If it\u2019s just going to be for a couple of years, perhaps you could make do with something a little smaller until you\u2019re ready to upgrade to a larger house<\/a>.<\/p>\n The number of bedrooms and bathrooms<\/a> the house has is going to play a big role in how much the house will cost.<\/p>\n If it\u2019s just you, and you don\u2019t plan on having kids any time soon, maybe you could stick with a two-bedroom house that has just one bathroom. You\u2019ll have that extra room to turn into whatever you\u2019d like, and you won\u2019t have to worry about cleaning an extra bathroom! It\u2019s nice to have that extra room just in case<\/i> but ask yourself if you really need that space.<\/p>\n The features inside the house are important, but you don\u2019t want to overlook the outdoors, either. Ask yourself how important a backyard is to you, and if it is, what features do you want in a yard<\/a>.<\/p>\n Do you want a large backyard because you have a couple of dogs who love to run around? Do you like to entertain and therefore you want a sizable patio<\/a> or deck area? If you have a green thumb, do you want a yard with space to create your own garden<\/a>, or do you want a house with low maintenance landscaping<\/a>?<\/p>\n The market is another big factor that needs to be taken into consideration. Your money may go a lot further in one neighborhood than it would another.<\/p>\n Your desired area may be in a hot seller\u2019s market<\/a>, which means you may have to reevaluate your budget or what features and amenities you want in a house. Then again, you may be entering a strong buyer\u2019s market<\/a>, and you may be able to negotiate for a lower price<\/a>, ask for repairs to be made, or ask for help with closing costs.<\/p>\n If you\u2019re unsure what the market is doing when you\u2019re ready to buy, don\u2019t be afraid to ask your agent!<\/p>\n When you make that monthly mortgage payment, you aren\u2019t just paying back the loan principal and interest. The mortgage payment will include extra costs<\/a> like mortgage insurance<\/a> (if the lender requires it), homeowner\u2019s insurance<\/a>, property taxes, and HOA fees<\/a> (if applicable).<\/p>\n![\"First](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/01\/how-much-house-should-i-buy-finances-666x381.png\")
<\/a>Finances<\/h2>\n
Income<\/h3>\n
Debt<\/h3>\n
\n
Savings<\/h3>\n
Down payment and\/or closing assistance<\/h3>\n
Credit score<\/h3>\n
Mortgage rates<\/h3>\n
![\"Consider](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/01\/how-much-house-should-i-buy-size-666x381.png\")
<\/a>Housing considerations<\/h2>\n
How long will you be living in the house?<\/h3>\n
How many bedrooms and bathrooms do you need<\/i>?<\/h3>\n
What are your outdoor requirements?<\/h3>\n
What is the local market like?<\/h3>\n
What will your monthly mortgage include?<\/h3>\n
![\"There](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/01\/how-much-house-should-i-buy-together-666x381.png\")
<\/a>