|The American Dream|
Saturday, March 01, 2014
Shopping for a home, especially your first one, can be tough when you’re not sure how much you can afford. If you've wanted to live the dream of owning your own home, but haven’t been sure where to start, I've put together a few tips that can make it easier to get a handle on where to start.
1. Tax benefits usually mean you can afford more than your rent. Interest deductions on taxes typically translate into significant savings. Many people find they can afford about 33% more than their current rent. To get an idea of what this might be for you, multiply your current rent by 1.33.
2. A home price three times your gross income is usually a reasonable place to begin. For example, if your household made $75,000 last year, you could begin looking in the $225,000 range to start.
3. Know how much you can put down. Ideally, you’d want to have 20% of the home’s price set aside for a down payment. On a $200,000 home, this would be roughly $40,000. You can definitely put down less money, as low as 3%, but it may result in higher interest rates (which translate to higher monthly payments). It will still be better and most likely less expensive than renting. If you are a veteran, you can buy a home with no money down, and still get the lowest interest rates.
4. Determine your “debt factor.” Lenders will often cite the 28/41 rule when it comes to your debt. This means that your mortgage (plus taxes and insurance) shouldn't exceed 28% of your gross monthly income. Your total payments (credit card, car loan, etc.) plus your mortgage shouldn't come to more than 41% of your gross monthly income.