Buying a house is one of the biggest financial decisions that one will ever make. This is why it is important to ask yourself, “how much a house can I afford?” This question should be answered by a thorough assessment of your monthly income or annual income, and this fares compared to the price of the house you intend to buy. Besides assessing your income, you should also know the other costs accompanied by buying a house like property taxes and interest rates.
Finally, you should make sure to consider prior financial responsibilities that you need to keep paying while paying for your mortgage, like credit cards, student loans, and other expenses that require a monthly payment. This article will help you assess whether you can afford to pay for a house and what it will take to start building your home.
How Much Mortgage Can I Afford?
The most common way of paying for a house is a mortgage payment. A mortgage is a debt instrument where you make a house purchase without paying the entire amount. Instead, you will pledge the house to a bank or other lending institution. You will pay them the mortgage for a specified number of years until the house is fully paid for.
If you failed to give your mortgage payment, then the bank can foreclose the house. This is why it is important to ask yourself: “how much of a house can I afford?” and decide on the terms of your mortgage payments.
You may choose between the two most common mortgage types: the fixed-rate mortgage and the adjustable-rate mortgage.
On the one hand, the fixed-rate mortgage is more popular because it means that the monthly principal and the interest rate remain the same over the years. If you pay a mortgage for a 30-year term, then the amount and the interest rate remain the same for 30 years.
The adjustable-rate mortgage, on the other hand, depends the interest rate on the market. It fluctuates depending on the market conditions; hence, it can either increase or decrease. Thus, for a 30-year term, the amount that you pay will vary for the said period. The fixed-rate mortgage is a safer option because it is more stable and predictable.
After determining the type of mortgage, you should then compute how much mortgage you can afford to pay by factoring in your current expenses, your household income, and the amount of your mortgage payment. For example, you should be able to take into account your monthly debt like an outstanding student loan or credit card bills, together with other household expenses like food, utility bills, health insurance, and transportation.
Ask yourself how you are dealing with these expenses, given your current income and whether or not you can still afford to pay for a house on top of these expenses.
It is recommended that you keep an amount worth three months of all of these payments in reserve so that you will not be driven down into a personal financial crisis should an emergency happen.
Moreover, despite the fact that you are not expected to pay the full amount of the house, you can still shell out a down payment.
This depends on the deal you chose with the seller, but the amount you will give in down payment should come from your savings.
The downpayment should not deplete all of your savings because you still have to be prepared in case of emergencies at home like medical emergencies, accidents, and calamities.
How Does Your Debt-to-income Ratio Impact Affordability
The debt-to-income ratio pertains to the percentage of your gross or pre-tax monthly income that goes into paying your debts, including the house mortgage. The ideal percentage of your income that goes to debt payments is 36%. Banks are wary of approving loans and mortgages if this percentage is exceedingly high.
It would mean that you cannot afford to pay the mortgage on top of your existing debts like credit cards, student loans, and car loans. This is because of the accompanying risk of not fulfilling one’s financial obligation because of the small income buffer.
A slight change in the expenses can spell financial disaster, and lenders do not want this. This is why if you want a guaranteed approval of your loan, then you should watch out for your debt-to-income ratio.
How Much Should I Have Saved When Buying a Home?
Now that you have a picture of the recommended debt-to-income ratio, you should look at your cash reserve. After paying for the down payment, you should still have money left in your savings account.
The amount left in your reserve after paying the down payment is also a part of the answer to the question, “how much house can I afford?”. Suppose you see yourself with very little money in your savings after paying the down payment. In that case, it might mean that you really cannot afford the monthly payment of the mortgage, the interest rate, the property tax, the home insurance, among others. This is why financial preparedness is of the utmost importance.
As mentioned above, the general rule is that only 36% of your pre-tax income every month should go to the payment of your monthly debt, including the mortgage for your home. To have a clearer idea, look at the table below:
|Gross Monthly Income
|Remaining Income After Monthly Debt Payment (estimated S$400 monthly debt)
|Maximum Mortgage Payment if total monthly debt payment is 36% of gross income
But another important thing is to have saved enough to pay for the down payment. The standard rule is you should pay at least 20% of the total home price in a down payment. If your house’s total home price is pegged at S $ 80,000, then your down payment should be at least S $ 16,000.
After paying this amount in down payment, banks would like to see how much is left to your cash reserve. At the very least, you are expected to have at least three months’ worth of monthly mortgage payment left in your savings after paying the down payment. If you can expand this to six months worth of the mortgage’s monthly payment, that is even better.
Look at the table below:
|Gross Monthly Income
|Remaining Monthly Income After Monthly Debt Payment (estimated S$400 monthly debt)
|Maximum Mortgage Payment if total monthly debt including mortgage is 36% of gross income
|Minimum remaining cash reserve after paying down payment
In summary, you should save at least 20% of the total home price for a down payment and three months’ worth of mortgage, plus an additional amount for property taxes before you can say that you can afford to buy a home. You should also ensure that you have enough and secured income flow to avoid any failure to fulfill your financial obligations like home expenses and other debts.
What is the 28% / 36% Rule, and Why It Matters?
In answering the question “how much house, can I afford,” then you should determine the amount of the monthly mortgage you can pay given your income? To do this, you can follow the 28%/36% rule. Simply put, this rule states that you should not exceed using 28% of your gross monthly income paying for your home expenses.
Meanwhile, the amount of your monthly debt plus your monthly mortgage should not exceed 36% of your gross monthly income. This means that if you are earning S$3,000 gross monthly income and you spend S$350 for your existing monthly debts like student loans and credit cards, then your monthly mortgage should only amount to S$730.
By following this formula, you can make sure to consider your overall financial situation before choosing a house you can afford. It tells you of the mortgage’s level of affordability. This is important if you wish to see through the mortgage payment until the house is fully paid.
What Factors Determine ‘How Much House Can I Afford’?
Generally speaking, five major factors determine the price of the house you can afford. You need to study these factors carefully to succeed in making that house your home:
- Income- income pertains to the cash that you earn from a job, business, or investment. Income should be increased when possible through a regular job and sound investments in businesses, stocks, or bonds. This draws the baseline for the amount that you will be able to pay monthly.
- Cash Reserve- pertains to the amount of money that you have to pay for the down payment and other costs that accompany when you buy a home. This can include your savings, investments, and other financial resources.
- Debt and expenses- these can pertain to daily, monthly, and annual expenses. These include your spending and obligations like food, clothes, transportation, utility bills, and other miscellaneous expenditures.
- Credit profile- pertains to your credit score and standing. Your credit score and current liabilities are important factors that lenders consider in assessing how much more debt you can afford.
How Much Can I Afford to Spend on a House?
Everybody agrees on the importance of a home. That is why spending on a house you can afford is always a good idea. However, despite its importance, you do not want all of your money going into paying mortgage payments and down payment. Your income and expenses should jive, and a comfortable buffer must exist between the two.
As mentioned above, only 36% of your gross monthly income should go to the monthly payment of your debts, including the home mortgage. This means that you should have a remaining 64% to cover other expenses, savings, and emergency funds.
Deciding on ‘how much of a house can I afford’ should depend on how much money you can set aside for down payment, closing costs, other expenditures, and how much more you can set aside for continuing financial obligations, living expenses, and savings.
Given the rules and standards explained above, you can easily compute how much house price you can afford to pay, specifically how much house mortgage payments you can afford for every month for a 30 year or 15 year period.
How Much House Can I Afford on My Salary?
Salary is the major source of your annual income. Your income can be reinforced by other sources like side jobs and other investments, but the salary is the baseline from which the house price of the house you are eyeing should be compared.
In order to compute how much salary or annual income is necessary to buy a house with a special home price, you need to decide on the following: the home price, the down payment amount, the loan term, the mortgage interest rate, and your recurring debt. You would also need to know about the monthly property taxes, possible homeowner insurance, and homeowners association fee.
All of the housing costs should not fall beyond 28% of your gross annual income. Otherwise, you would run the risk of not being able to afford the mortgage or falling behind other bills and causing your credit score to suffer. This can cause more financial difficulties in the long run.
Why You Should Consider Buying Below Your Budget
The truth is everybody has his dream house, and a lot of people work hard to achieve this dream. They plan carefully, and they set a budget. However, it is still recommended that people contemplating buying a house should consider going below the budget prepared when possible.
This is a wise move considering that there may be other costs that you may incur when moving in that you had not taken into account when you made the budget. Examples are some repairs, adjustments in construction, and some necessary upgrades in house materials and fixtures.
Going below your budget in your purchase can help these unforeseen expenses as you move into your new home.
Why You Should Wait to Buy a Home
A home is a big investment. This is not something that you should get into without proper preparation and serious effort in saving. It is often accompanied by a lot of obligations, like taxes and insurance. In buying your first home, waiting is worthwhile, and patience is a virtue.
It would help if you took your time to get your finances together, increasing your savings, reinforcing your cash flow, securing a stable job, and shooting up that credit score. Buying a home without proper financial preparation can spell financial ruin.
It would help if you always were reminded that having a fat savings account means having a formidable cash reserve. The more money you have in your account, the higher the down payment you can shell out. If you pay more than 20% of the home price as a down payment, say 40% or 50%, then the interest rate will also be lower.
This will significantly decrease how much house mortgage you will need to pay for the next three decades. You will have a better answer to the question of how much a house can afford. If you wait a little more for everything to fall into order, then you may even be able to buy a home that is comfortable and conducive for you and your family.
Buying a home should not be done rashly. The answer to the question “when do I need to buy a home?” is “when you are ready.” Furthermore, the answer to the question of “what kind of home should I buy?” is “the home that you can afford.” Your readiness is dependent on the combination of factors that should be considered about one another.
Your monthly or annual income should not be less than your debt and expenses. Your credit score should be decent, and your debts should not be too excessive. Your cash reserves and savings that remain after you pay the down payment, the property taxes, the mortgage with the interest rate are also looked at as an indication of the price of the house you can afford.
Your home should be more or less a permanent aspect of your family life. It is important that once you get one, you will be able to keep it for the rest of your life and utter the words “home sweet home” every day. Let Bugis Credit help you build your dream home through their excellent loan offers, visit Bugis Credit and get the best loan deals in Singapore!