Our Answer to the Buyer’s Question: “Can I Afford a Home?”

At the beginning of the year so many people were wondering, will 2023 be a good year to buy a house? So, don’t worry, you’re not the only perspective home buyer who’s wondering, “How much can I afford to buy a house for?” Buyers often think that they have to save for years to get to the financial vantage point where they can consider buying a home. Of course, the housing market isn’t cheap right now, but we want to give buyers a different perspective. With a few simple calculations, any and all potential buyers will be able to figure out if they’re in the ballpark to afford a home or new property this year.

Your Monthly Income (Before Paying Taxes)

The first step to discovering how to become a home owner is calculating one specific number: consider your total monthly income before taxes. This means your main source of income plus any sort of gig or side hustle; really think about every way you’re making money and add it all together for a lump sum.

2. Deduct Monthly Expenses

The next step in figuring out how to own a home? Deduct all of your minimum payments of your monthly expenses from this number. This includes your groceries, utilities, monthly student loan payments, minimum credit card payments on current debts, your car payment, and anything else you might be spending money on every month. 

Take a good look at the number you’re left with. If that number seems like a reasonable amount for a home mortgage payment, you’re likely in a good position to afford a home. 

3. Determine Down Payment

If buyers can afford it, making a substantial down payment reduces loan amount, monthly payments, and overall interest rates. A common down payment is 20% of the home's purchase price, but there are programs allowing lower down payments for buyers who have less financial power. Buyers would always talk to a real estate professional to be aware of all of possible options. Learn more about how to figure out the down payment on a home.

4. Estimate Monthly Mortgage Payment

Use our online mortgage calculator to estimate the monthly payment based on the loan amount, interest rate, and loan term (usually 15 or 30 years). Buyers, remember to keep long-term goals in mind. It’s also crucial for buyers to consider whether or not they will be living in the home long-term, as priorities will likely have an influence on financial decisions.

5. Account for Additional Costs

Consider possible costs like property taxes, homeowners insurance, maintenance, and future utilities and more hidden costs of owning a home. These may significantly impact your monthly budget.

The 35/45 Mortgage Model

Another great way to determine whether or not a buyer can afford a home is the 35/45 mortgage model. Using the 35/45 method, no more than 35% of a buyer's gross household income should go to paying off debt, including their mortgage payment. The best way to calculate this is no more than 45% of a buyer's net pay, or their after-tax dollars, should go towards their total monthly debt.

So, for example, with a $7,000 monthly gross income, 35% would be $2,450. So, a buyer should pay no more than $2,450.

But let’s say after taxes, insurance and other deductions, a buyer's take-home pay is $6,000. Multiply that by 45% and that’s $2,700. So the buyer's range would be between $2,450 and $2,700.

Another Example Scenario for Buyers Wondering “Can I Afford a Home?”:

  • Gross Monthly Income: $6,000
  • Monthly Debt Payments: $800 (credit card, student loan)
  • Desired Down Payment: $40,000 (on a $200,000 home, i.e., 20%)
  • Estimated Monthly Mortgage Payment: $900 (on a 30-year fixed-rate mortgage at 4% interest)
  • Estimated Additional Costs: $300 (taxes, insurance, utilities, maintenance)

Calculating Home Ownership Eligibility:

Remaining Monthly Budget: $6,000 - 800 - 900 - 300 = $4,000

Based on these calculations, the prospective homebuyer in this scenario can comfortably afford the mortgage and additional costs within their budget. In the end, they are left over with $4,000. Plus, these calculations represent the same process credit underwriters use to determine their clients’ home-buying eligibility! Buyers can be assured that their numbers will accurately reflect their purchasing power. 

Of course, these calculations rely on finding a home within the buyer’s budget. If you’re still left wondering “Can I afford to buy a home?”, don’t hesitate to reach out. We believe that behind every successful buyer is an experienced real estate professional. Get in touch with our agents to learn more about real estate in the Space Coast, Florida area.

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