Are you considering buying a new house but unsure of how much you can afford? In this blog post, we will discuss the key factors to consider when determining the affordability of a house purchase. This information complements the video uploaded on the Functional Retirement Youtube channel, where we provide a detailed breakdown of the costs involved in buying a house. So, let's dive in!
Affordability is not just about the amount you get approved for by the lender. It is about being able to purchase a house without compromising your short-term or long-term financial goals. The first step is to determine how much a lender would approve you for. This calculation typically involves dividing your gross income by 12 and then dividing that number by two. Subtract all your debts from this amount to get your potential monthly mortgage payment.
PITI stands for principal, interest, taxes, and insurance. This represents your full housing expense and includes your mortgage payment, property taxes, homeowner's insurance, and any mortgage insurance or HOA dues. It is crucial to consider these costs to ensure you can afford to maintain your house in the long run.
Once you have determined your potential monthly mortgage payment, it's essential to assess how it fits into your overall budget. Start by considering your taxes and deductions. Subtracting these from your take-home pay will give you a clearer picture of your available funds. Remember, your mortgage payment should ideally not exceed 28% of your gross income, as recommended by the housing expense ratio.
Affordability varies depending on where you live. For example, in San Francisco, where the median home value is $800,000, the recommended minimum annual income is $128,000 for a 20% down payment. On the other hand, in Indianapolis, Indiana, with a median home value of $118,000, you may only need around $20,000 of income for a 20% down payment.
When it comes to buying a house, it's crucial to avoid stretching your budget too far. Instead of focusing on the price of the house you desire, consider what you can realistically afford based on your budget. Remember, a house is a long-term investment, and you can always make updates and improvements over time.
Determining the affordability of a house purchase involves careful consideration of your income, expenses, and long-term financial goals. By following the guidelines mentioned in this blog post and watching our accompanying video, you can make an informed decision about how much house you can afford. If you need further assistance, feel free to reach out to our team for comprehensive financial planning services.