Deciding how much home can you afford

Household 3 min read

If your family is contemplating a move, you are probably asking yourself how much house you can afford. This is such a smart place to start! I know from experience just how easy it is to fall in love with a home and truly start imagining raising your family in it, only to find it does not fit within your current budget.

This feeling can also cause you to make a home-buying decision that isn’t good for your family long-term. Doing some research before you buy is a great way to avoid both of these problems.

I am in this position right now. After nine years in our home, my husband and I are contemplating a move. We have seen just how quickly life stages can change and are wondering if a new home will be a better fit for the life that we want to have today and five years from now.

Because the last time that we made this decision was almost a decade ago, I know that there is a lot to learn about and to consider before buying a new home. There are two pieces of information that we need to gather: how big of a loan we can get and how big of a loan we can afford. These are two different things! One of my favorite resources to use to clarify both house affordability and how different price points would affect our everyday lives is NerdWallet.

Here are several other resources that we use:

In terms of affordability, at a very basic level, there are two things that a bank will use in deciding how big of a home loan people can take:

  1. What percentage of your gross income are your monthly housing costs.
  2. And what percentage of your gross income is your monthly housing costs and other fixed payments and debts.

According to NerdWallet, your monthly housing costs should (conservatively) total 28% or less of your gross income (your salary before taxes and deductions).

Your monthly housing costs include:

  • Payments toward your mortgage principal
  • Interest
  • Real estate taxes
  • Homeowners insurance

Your other fixed costs may include:

  • Student loans
  • Car payments
  • Credit card debt
  • Health and car insurance
  • Utilities and bills
  • Savings

Using the same formula that a bank would use, I can plug different home price points in to see how much house our family can afford, or what percentage of our income different home price points would use.

It is so tempting to convince ourselves that we can afford more than we actually can. This is why I love using tools that lay the numbers out for me. This is a great place to start!

Using the percentage formula gives great insight. When it comes to what a higher housing cost would mean to our everyday lives, my husband and I have another strategy that we use.

As we find houses that we love that would have different monthly housing costs than our current place, we create and live to the budget that we’d need to if our house payment was this new amount. This lets us see firsthand what that price point would mean for our family in our everyday lives, with the added benefit of padding our savings (if it’s less than our current payment amount).

Making the decision to buy a new home can feel overwhelming. It is so helpful to break down this initial first step into two parts: the loan you can afford and what this loan would mean for your monthly budget. As you start to consider house affordability, these tools are all great options to help explore how much house you can afford as well as what this would look like in your everyday life.

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