Jan 13, 2018
What’s Your Home Buying Power?
If you’re in the market for a new home or investmentproperty, one of the first questions you’ll probably ask is, “What can weafford?” Many buyers become so caught up in how much they can afford that theydon’t realize their total buying power—that is, the total amount ofpurchasing potential they actually have.
Buying Power Defined
Your buying power is comprised of the total amount of moneyyou have available each month for a mortgage payment. This means the money youhave each month after fixed bills and expenses. Any money you’ve saved for adown payment, the proceeds from the sale of your current home, if applicable,and the amount of money you’re qualified to borrow all impact your buying poweras well. When you take all of this into account, you may find you are able topurchase a larger home or a home in a more desirable neighborhood, or you mightrealize you should be looking for homes in a lower price range.
What About HousingAffordability?
Housing affordability is a metric used by realestate experts to assess whether or not the average family earning an averagewage could qualify for a mortgage on the average home.1 Althoughthis figure is essential to creating a comprehensive overview of the realestate market, it’s not a factor you should consider in your home search. Whatmay be considered affordable to you based on your income and other factors maybe different than what’s affordable to the average buyer.
Why Buying PowerMatters
A common misunderstanding is that a home’s list pricedetermines whether or not you can purchase it. Although it’s important to lookat the price tag, it’s essential to consider what your monthly payment will beif you own the home. After all, the purchase price doesn’t include the housing-relatedexpenses, such as annual property taxes, homeowner insurance, associatedmonthly fees and any maintenance or repairs. Figuring out the payment willprevent you from overestimating or underestimating your buying power. Afterall, you’ll live with your monthly payment, not the sales price.
Once you have clarity on your buying power, you’ll be ableto buy the home you want, instead of settling for a home because you feel it’sthe only one you can afford. It will also prevent you from becoming “housepoor,” a common term for someone who’s put all their money toward the downpayment, leaving them nothing left over for fees outside of their monthly housepayment. Both scenarios can negatively impact the lifestyle you want to live.Understanding your buying power can help you get the home you want withoutsacrificing the lifestyle you desire.
If you haven’t soldyour current home yet, a Comparative Market Assessment (CMA) will give you ageneral idea of how much you may get for your home based on what other homeshave sold for in your area. Contact our team for a FREE CMA!
Calculating YourBuying Power
You might be wondering, “How do I know what my buying poweris?” Buying power is calculated by adding the money you’ve saved for a downpayment and/or the money you made from selling your home (minus fees andmortgage payoff) to all of your sources of income and investments that could beused to make your monthly payment. Make sure to include your monthly pay,commissions or tips, dividends from investments, payments from rentalproperties or other monthly income you receive as well as the loan amountyou’re willing to finance and qualify for.
Most lenders advised buyers to spend no more than35 to 45 percent of their pretax income onhousing, meaning all your income and sources of revenue prior to paying taxes.Make sure you factor in not only your mortgage payment, but also property taxand home insurance to the cost of housing.2 However, other financialexperts advise spending no more than a very conservative 25 percent of yourafter-tax income on your housing expenses.2 Whether you plan to spend the average, playit conservative or split the difference is up to you.
Traditionally,mortgage lenders have targeted the ideal housing expense amount to be a ratioof 28 percent or less.3
However, these figures bring up an important point: youdon’t have to spend all of your savings and available monthly income on amortgage payment. It’s important to set money aside for regular homemaintenance, unexpected repairs and monthly fees, such as a condominium orhomeowners association fee. While the above ratios are commonly accepted, alender will look at your total financial picture when they decide how muchthey’re willing to lend. It may be tempting to take out a large loan in orderto purchase the home of your dreams, but keep in mind the less money you haveto borrow, the stronger your buying power may be.
4 Things That ImpactBuying Power
How to Save for a Down Payment
If you’re thinking of buying a home one day, one of thefirst steps to take is to start saving for a down payment. Here are some tipsto make saving easier.
More than 52 percent of repeat buyers used the proceeds fromthe sale of their primary residence toward the down payment on their next home.4Similarly, 76 percent tapped into their savings accounts.4 If you’rethinking of buying another home, here are more ways to save more money, inaddition to the tips listed above:
If you want to buy aninvestment property
Whether you’re buying a second home or a rental property,here are a couple tips to save for a down payment.
Work Out Your Buying Potential
What’s your buying potential? Fill out this worksheet to getan estimate.
|Housing Expense Ratio:|
|1. Monthly income before taxes||$|
|2. Multiply line 1 by 0.28||X 0.28|
|3. Monthly mortgage payment (PITI) should not exceed this amount||= $|
|4. Monthly income before taxes||$|
|5. Multiply line 4 by 0.36||X 0.36|
|6. Total monthly payments on all debts (including mortgage) should not exceed this amount||= $|
|7. Subtract the total monthly payments on all outstanding debts (e.g., car loans, credit cards, student loans, etc.)||– $|
|8. The monthly mortgage payment should not exceed this amount||$|
|9. Look at line 3 and line 8. The lower figure is an estimate of the maximum mortgage payment in consideration of your income and debts.||$|
|10. Multiply line 9 by 0.80||X 0.80|
|11. This equals portion of your mortgage payment that is the principal and interest only||$|
|12. Use the table below to see the size of the loan you may be able to obtain with this monthly mortgage payment.|
Source: Iowa State University Extension, What is your house-buying power?
Monthly Payment on30-Year Fixed Rate Mortgage
Didn’t see yourdesired loan amount? Use the table below to estimate your monthly payment(principal and interest) per $1,000 of your loan. To figure out an estimatedloan payment, multiply the factor by the number of thousands in the amount ofyour mortgage.
For example, if you intend to borrow $400,000, with a loanterm of 30 years at 4% interest, multiply 4.77x 400 = $1908 per month.
|Interest Rate||15-Year Term||30-Year Term|
|Monthly Payment||Monthly Payment|
Don’t forget tofactor in property taxes and insurance. These are often added to yourprincipal and interest of your mortgage payment—the money used to pay down the balance ofyour loan and the charge for borrowing the money. Since these numbersvary, contact your county assessor’s office for the current property tax rateand your insurer for a home insurance quote. Once you have these figures,divide each by 12 to estimate how much they’ll add to the above paymentamounts.
Do you want a clearerpicture of your buying power? Would you like to see what kind of homes you canget with your buying power? Give us a call!
Sources: 1.National Association of REALTORShttps://www.nar.realtor/topics/housing-affordability-index/methodology
4.National Association of REALTORS, 2016 Profile of Home Buyers and Sellers