2021 BOISE IDAHO REAL ESTATE BLOG
4 Questions to Ask Yourself About Housing Affordability Costs Main Treasure Valley Life

One of the central questions in real estate is: “How much house can I afford?”. Since what you can afford sets the standard for the homes you can search for and reasonably buy, we have a short list of 4 questions to ask yourself to be realistic about your home buying goals.

There are really two times that these and similar questions will be asked. First, have answers to all of them before you start looking to buy a house in earnest. The second will be after you hire a real estate agent to represent you. In order to find out what your wants/needs are, your REALTOR and your lender will want to know about how your financial situation will guide your homebuying process. With your agent and your lender, there will be drill-down follow-up questions for each one, so these 4 questions can help serve as a good starting point.

How much does this home actually cost?

This goes beyond what you pay to purchase the home and your monthly mortgage payments. You will also have to factor in homeowner’s insurance, property taxes, and HOA dues. This is where it is important to talk to your real estate agent about your finances so they can factor these into their home search criteria. In addition, many former renters are shocked how costs for air filters, sprinklers, HVAC maintenance, water heater maintenance, and general upkeep stack up. With no landlord to cover these, homeowners are on the hook for all of these and more

The rule of thumb is to keep housing costs at no more than 28%-30% of your take-home income. This allows some elbow room for unexpected repairs, savings, and allowing a potential family to grow.

How much will your down payment be?

Before you even buy the home, consider how much money you are able to put toward a down payment. 20% is considered a good benchmark, but there are multiple times where a sub-20% down payment is prudent or necessary. This mostly applies to first-time homebuyers who may not have had the time or income to save up 20%. There are many loan programs that allow buyers to put as little as 3.5% down on a house. However, putting down less than 20% will cause the lender to add Private Mortgage Insurance (PMI) on top of the loan payments in order to protect themselves in case you default. PMI is usually 0.3-1.2% of the purchase price. Putting 20% down or more eliminates the possibility of PMI.

Will you have spare cash left over after the purchase?

Disregarding how much it costs to buy a home, moving is expensive. After buying a home, there are the costs of the moving materials, hiring a moving company, buying pizza for the friends and family who help you move, and the gas to get between your old home and your new one. On top of that, many homebuyers run into overlapping final payments on their old home and first payments on their new home.

It is important to have money set aside as an emergency fund in general, but especially so when you move. This way, you have some reserve cash to offset extra costs incurred in the move or if the refrigerator or washing machine needs repairs shortly after moving. A home warranty can help with this, but there are still some things you will need to pay for despite the warranty.

Finally, something will get upgraded or replaced every time you move. A bigger couch, new TV mounting hardware, new bed frame, better kitchen table, or something else won’t suit your needs in your new home, so you will need to pay for their replacement/upgrade.

What is your debt-to-income ratio?

It is unrealistic for anybody to be completely debt-free. Student loans, credit cards, car payments, current mortgages, and more are all completely normalized in today’s society. For the most part, these can be considered good debt if you are on top of or ahead of your payments. Still, nobody likes to be in debt. To that end, lenders are fine if you have certain debts, but will take an in-depth look at your finances and payment histories to make sure that you will be able to reliably pay back the loan. Before talking to a lender, look at your debt-to-income ratio. Make sure you are not spending more than you are able. To determine your DTI, add up all of your monthly expenses and divide it by your monthly take-home income. If the ratio is tight or bad, consider budgeting and trimming the fat in order to get your finances under control.

Some lenders will be wary of high credit card balances since this may be an indicator of spending above your means. Make sure that buying a home will not overextend your pocketbook to the point you become house-rich but cash-poor or default on your payments.

 

Buying a home is not a decision that is made lightly. Often, it is a decision that begins to happen years before looking for homes for sale on the MLS in earnest with a real estate agent. It starts by evaluating your financial and lifestyle needs and setting your future self up for success early. 

 
Posted by AndrewS at 7/7/2021 4:10:00 AM
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